Chapter 1 – From feast to famine
We show how recent financial market crises were in large part a product of changes in global savings flows. An abundance of global savings weakened the collective discrimination of risk and reward in investment, resulting in serial misallocations of savings and asset bubbles. Demographic trends suggest that the world is moving past the highwater mark for abundant savings. Although the frequency of bubbles might therefore decline, we highlight how the same trend will increase risk premia, particularly for bonds, in the decade ahead. We outline some reasons why equities are likely to earn an above average risk premium over government bond investments in the next 10 years.
Chapter 2 – Bubble identification and some implications
In this chapter, we examine two ways in which asset price bubbles can be identified. Policymakers are now taking a much greater interest in stopping such bubbles materialising in the first place. However, unless they suddenly become extraordinarily successful in doing this, investors who help eradicate bubbles once they have appeared, by tilting their portfolios along the lines that we suggest, should manage to tap a decent source of alpha.
Chapter 3 – Dissecting recoveries
The past decade has provided investors with the rollercoaster ride of two equity market crashes and one of the sharpest global recessions in history. Fears that the 60% rally in equities may have finally drawn to a close have shifted investor focus toward the nature of recoveries. In this article we analyse the speed and duration of previous financial recoveries and examine the key drivers that have helped fuel or stall the rally. We find that historically equity rallies have not necessarily been sustained by economic growth and profitability, but monetary policy and credit conditions. We question whether a clearer understanding of the credit cycle can shed light on the timing of financial turning points.
Chapters 4 and 5 – UK and US returns
We publish last year’s US and UK asset returns, placing them within the historical context. Equities strongly outperformed government bonds in both markets. Government bonds performed dismally, with US government bonds (the index is of 20y maturity treasuries) returning minus 15.5%, the worst return in our 84 years of records. Corporate bonds performed strongly, returning 15.8% in the UK and 16.3% in the US. Despite the recovery, equity returns over the past decade are still negative.
