8/3/2019 Olivers Insights Low Return World Ten Years On

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Oliver’sInsights

Key points > Bullets

Heading 1 or 2

Shane Oliver, Head of Investment Strategy& Chief Economist

EDITION 6 – 24 FEBRUARY 2012

Low return world ten yearson – what does it mean orinvesting?

Secular bull markets, or 10 to 20-year periods where the trend inshares is up, can be seen in the 1920s, 1950s and 60s, and the 1980sand 90s. In between in the 1930s and 40s, 1970s and over the pastdecade are secular bear markets which are longer term periods whereshares have poor and volatile returns.

These secular bull and bear phases are driven by a combinationo the macro environment and related long waves o innovation,periods o excess in the provision o credit and long term swingsin market valuations. In summary;

 > The 1920s bull market was associated with electricity, massproduction and easy credit. The good times ended when markets

became overvalued and the world slipped into depression. > Cheap valuations, post war consumerism, petrochemicals,

electronics, aviation and low ination underpinned the secularbull market o the 1950s and 60s.

 > By the late 1960s shares had become overvalued again. This, incombination with rising ination, poor economic managementand oil shocks, gave way to a secular bear market in the 1970s.

> This set the scene or the secular bull market o the 1980s and1990s, which started when shares became very cheap in 1982.Share market growth was underpinned by the shit to lowination, deregulation, globalisation, the peace dividend andultimately, the technological revolution.

 > By the turn o the last century, shares had become expensive againand the ‘tech wreck’, corporate governance scandals, a burstingo credit and various housing bubbles and public debt concerns

have all underpinned a secular bear market in US and Europeanshares since 2000.

Where are we in the current secular bear market?The frst thing to note is the current secular bear market is gettingquite long, running at 12 years, whereas the norm is 10 to 20 years.Furthermore, there are some signs o light in the direction setting o the US. Cumulative real returns rom US shares have now allen wellbelow their long term trend and are running around levels associatedwith the start o secular bull markets in 1920, 1949 and 1982.

US shares – cummulative real return index – deviation from trend

Source: Global Financial Data, AMP Capital

Furthermore, the US manuacturing sector seems to be staging somesort o renaissance, with numerous companies opening plants orexpanding production capacity.

While there are some positive signs and the current secular bearmarket in global shares may be ‘long in the tooth’, our assessmentis it could still have some way to run or the ollowing reasons:

 > The message rom valuation indicators is mixed. US shares arecheap compared to the history o the past 20 or 30 years and areparticularly cheap compared to bonds, which are oering yields ator around record lows. This is all consistent with more gains in thecurrent cyclical upswing. Against this though, the so-called GrahamDodd or Robert Shiller Price-Earnings ratio calculation, whichmeasures shares against a 10 year moving average o earnings to

Oliver’sInsights

Key points > We have now been in a low return investment world or

more than a decade globally.

> While the US long term or secular bear market in shares

that started in 2000 is getting ‘long in the tooth’ and

showing some positive signs, it could linger or a ew yearsmore. Valuation measures could still move to secular bear

market extremes and debt reduction, ageing populations

and less business riendly governments are all likely to

constrain growth.

> For investors, particularly those with a shorter term horizon,

this highlights the importance o paying more attention to

asset allocation and to considering investment strategies

that target particular outcomes (eg, a particular income

ow or a targeted rate o return).

Introduction

A decade has now passed since I frst wrote a note suggesting thatwe are coming into an environment o low and volatile investmentreturns.1 At the time, I and various investment strategists wereconcerned the drivers o the super normal returns rom mostasset classes rom the early 1980s had largely run their course andthereore, sustainable returns would revert to longer term norms.While a high return world lingered or Australian-based investorsup until 2007 (thanks to a strong perormance by the Australianshare market during the frst mining boom), low sub-par mediumterm returns have been a phenomenon or US and Europeaninvestors or the last decade and even longer or Japanese investors.This all begs several questions – i the low return world is more thana decade old is it nearly over? I not, what does it mean or the waywe manage money?

The secular ebb and fow o sharesIt should be well known that share markets go through longer termsecular bull and bear phases. This is most clearly evident in the USshare market (which o course sets the direction or global shares)and illustrated by the ollowing chart, one o my avourites. It showsthe cumulative real value o $100 invested in 1900.

Long term bull and bear phases in US shares

Source: Global Financial Data, AMP Capital

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

Real value of US$100 invested in January1900. Every unit move up in the scaleon the left is a doubling of value.Based on US S&P 500 realaccumulation index.

Bull

Bull

Bull

Bear

Bear

Bear

100

400

1600

6400

25600

102400

 

-80

-40

0

40

80

120

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

% deviation from long term trend

Arrows indicate start of secular bull markets

1 See “Living in a low return world”, Oliver’s Insights, February 2002.

8/3/2019 Olivers Insights Low Return World Ten Years On

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