The Equity Market: A Decade of Exceptional Returns and a Cautionary Note

Over the past decade, the equity market has consistently outperformed other investment options, with shares delivering nearly all-time high returns in the latest edition of the Equity-Gilt Study produced by Barclays de Zoete Wedd (BZW). Despite this, the study's managing director, Michael Hughes, cautions that recent high returns cannot continue, citing exceptional performance in the past 10 years for all investment types, including equities, gilts, and cash. Hughes suggests that this exceptional performance may be due to a stimulative monetary policy and a growing share of company profits, which may not be sustainable in the future.

Key Takeaways:

• The Equity-Gilt Study has consistently shown that the equity market has delivered the highest returns since 1918, with the FTA All-Share index outperforming inflation even after accounting for income tax.
• The past 10 years have been exceptional for investors, with equities, gilts, and cash all experiencing high returns.
• The recent re-rating of shares has led to a prolonged period of over-valuation, but market experts do not believe that a crash is imminent.
• The two main factors associated with periods of overvaluation are a stimulative monetary policy and a growing share of company profits represented by dividends.
• Companies have shifted their focus from paying out to workers in the form of wages to paying out to shareholders in the form of profits and dividends since the 1980s.
• The competitive global market and changing political attitudes suggest that this trend is unlikely to reverse in the near future.

Statistics:

• The FTA All-Share index has delivered a return of 44.8% since 1962, outperforming inflation and cash deposits (Source: BZW).
• The past decade has seen exceptional performance from all investment types, with the SGI index returning 21.1% per annum compared to the long-term average of 13.6% (Source: BZW).
• Since the 1980s, the share of company profits paid to shareholders has increased, while the share paid to workers has decreased (Source: BZW).
• The current value of the FTA All-Share index is 244.1, indicating a prolonged period of over-valuation (Source: BZW).
• Company profits have increased from 5.4% in 1980 to 6.9% in 1993, indicating a growing share of profits paid to shareholders (Source: BZW).

Sources:

• Barclays de Zoete Wedd (BZW) (1994)
• The Sunday Times, "There is only one sensible home for long-term money: the equity market" (1994)