In 120 years, equity returns have outpaced bonds & bills: Credit Suisse

Adjusted for inflation, equities as an asset class have returned 5.2 per cent on an annualised basis over the past 120 years (since 1900), outpacing the returns by bonds at 2 per cent and bills at 0.8 per cent, says the latest Credit Suisse Global Investment Returns Yearbook 2020.

The countries included in the Yearbook represented 98 per cent of the global equity market in 1900 and still represent over 91 per cent of the investable universe at the start of 2020. In all, Credit Suisse has included 26 countries for the study as a part of this Yearbook.

Over the past 120 years (since 1900), equities have outperformed bonds, bills and inflation in 21 countries. For the world as a whole, equities outperformed bills by 4.3 per cent per year and outperformed bonds by 3.1 per cent per year.

However, over the last decade, global equities performed well with an annualised real return of 7.6 per cent, as compared to real return of 3.6 per cent from bonds, Credit Suisse says. As regards bonds, Sweden has been the best-performing country in terms of real bond returns, with an annualized return of 2.7 per cent since 1900, followed by Switzerland, New Zealand and Canada with annualized returns of 2.4 per cent, 2.3 per cent and 2.2 per cent, respectively, the Credit Suisse study says.

“2019 was a superb year for equities, with the Yearbook world index returning 28 per cent (measured in US dollar terms). The best performing market was Russia, with a return of 56 per cent (in US dollar terms), followed by Switzerland at 33 per cent. The US equity market gave a return of 30 per cent. Despite very low start-year yields, bonds also performed well in 2019, with returns of 12 per cent in the US, 9 per cent in the UK and Switzerland, and just over 10 per cent (in US dollar terms) on the world index,” wrote Richard Kersley, head of global thematic research at Credit Suisse in the Yearbook 2020 co-authored with Nannette Hechler-Fayd'herbe, their chief investment officer for International Wealth Management.

Region-wise breakup

Among regions, Australia’s stock market achieved an annualised real return of 6.8 per cent per annum since 1900, in US dollar terms, making it the world’s best performing stock market, ahead of the US, South Africa and New Zealand. While India, Credit Suisse says, was added to this study in 1955, while China and Russia were added to the database in 2013.

The US, according to the study, remains the world’s largest equity market and accounts for over 54 per cent of the world’s investable, free-float market capitalisation (m-cap), followed by Japan at 7.7 per cent, the United Kingdom at 5.1 per cent in third place, and China at 4 per cent.

Credit Suisse Wealth Management sees mid-teen growth in Nifty earnings

Despite a likely 100 basis point (bps) cut in growth forecast going ahead, earnings for Nifty Index in 2020 could settle in mid-teens as compared to a consensus estimate of around 26 per cent for financial year 2020-21 (FY21), wrote Jitendra Gohil, Head of India Equity Research, Credit Suisse Wealth Management in a recent co-authored note with Premal Kamdar, their equity research analyst.

A large part of this growth, they feel, will come from lower provisioning needs of the financials, which we estimate could contribute over 80 per cent to the incremental growth in Nifty Index earnings.

“With the current tariff hike – and potentially next year as well – the telecom sector is well set to accelerate its earnings momentum. On the other hand, volatility in earnings can come from metals and mining companies and energy. Consumer companies have already benefited this year with tax cuts and hopefully they will be able to cut cost and protect margins to withstand slower consumer spending environment in 2020,” the Credit Suisse note says.

Gohil and Kamdar expect the information technology (IT) sector to clock in see moderate growth of single-digit, while industrials and capital goods companies could see sharp cuts in earnings if growth fails to pick up materially.

"While we acknowledge that earnings growth expectations are elevated and do not completely price in India’s deteriorating growth outlook, the equity market tends to bottom-out well ahead of the bottoming of GDP (gross domestic product) growth and earnings," the co-authored note said.

Credit Suisse believes the recent reform measures – cut in corporation tax, likely privatisation of public sector companies, improving ease of doing business, strengthening of the insolvency and bankruptcy code, and introduction of Real Estate Regulatory Authority (RERA) have increased confidence in the formalisation of the economy – is positive for markets.

Within the markets segments, they do not forecast a major underperformance by the mid-caps in 2020 given the valuation comfort.

“Currently, the Nifty Midcap 50 Index is trading at a 12-month forward P/E of 14.8, which is a 20 per cent discount to the large caps; in line with the discounts that the mid-caps commanded before mid-2016, post which the mid-caps started trading at an exorbitant valuation premium of up to 50 per cent reached in December 2017,” the Credit Suisse note said.

That said, they see moderate returns from the markets as they rule out a broad-based recovery in economy and acknowledge that the government does not have much room to stimulate growth.

“In 2020, we are likely to see pockets of growth rather than broad-based growth, hence we recommend concentrating portfolios across large caps and quality mid-caps, where growth visibility is high. We continue to like private banks, chemical companies, IT and NBFCs. Consumption is a structural growth theme in India and we continue to like stocks that are impacted by urbanisation, though growth has been slower than anticipated,” the Credit Suisse Wealth Management note says.