February 2020Summary Edition Credit Suisse GlobalInvestment Returns Yearbook 2020Elroy Dimson, Paul Marsh, Mike StauntonThought leadership from Credit Suisse Research and the world's foremost experts
Coverage of the Summary EditionThis report is a summary version of the fullCredit Suisse Global Investment Returns Yearbook2020, which is available in hardcopy only andcontains four deep-dive chapters of analysisleveraging this unique dataset. The first chapterof the printed Yearbook describes the coverageof the DMS database, the industrial transformation that has taken place since 1900,explains why a long-run perspective is important,and summarizes the long-run returns on stocks,bonds, bills, inflation and currencies over thelast 120 years. The second chapter of the 260page volume deals with risk and risk premiums,documenting historical risk premiums aroundthe world and how they have varied over time.The third chapter of the hardcopy book – whichis highlighted in this extract – turns to the verycontemporary topic of responsible investing.The authors present conclusions drawn froma wealth of academic studies as well as newwork of their own. They study the implicationsof exclusionary screening, the limitations of theESG ratings that are the toolkit for many ESGinvestors, and whether ESG screening genuinelyenhances performance. The authors show thatthe route by which ESG investors can combinethe principles of responsibility with aims formaterial capital appreciation is to proactively usetheir powerful “voice,” and to harness thevoices of others to engage deeply with investeecompanies. An active rather than passiveapproach to ESG drives returns. The fourthchapter of the full Yearbook focuses on factorinvesting: size, value, income, momentum,volatility and other smart-beta approaches toasset management.2The full 2020 Yearbook concludes with anin-depth historical analysis of the investmentperformance of 26 global markets – 23 countriesand three transnational regions.To highlight the new and impactful research forthe 2020 Yearbook, the opening section of thisSummary Edition starts with an insightful andbroadly based review of ESG investing. The nextsection looks at investing for the long term, witha focus on long-run asset returns, risk and riskpremiums, and factor investing – all based onevidence that runs from the beginning of 1900to the start of 2020. The report concludes with ashort review of the investment performance ofthe most important markets in the world since1900, including China, Europe, Japan, Switzerland, the United Kingdom, the United States andthe World.To access the full Credit Suisse Global InvestmentReturns Yearbook or the underlying DMS dataset,please consult page 44.
04 Preface07 ESG investing19 Investing for the long term31 Individual markets33 China34 Europe35 Japan36 Switzerland37 United Kingdom38 United States39 World40 References43 Authors44 Imprint45 General disclaimer/important informationExtracted from:CREDIT SUISSE GLOBAL INVESTMENTRETURNS YEARBOOK 2020Elroy Dimson, Paul Marsh, Mike Stauntonemails: [email protected],[email protected], [email protected] for full Yearbook 978-3-9524302-9-3Cover photo: gettyimages, Bento FotographyFor more information, contact:Richard Kersley, Head Global Thematic Research,Credit Suisse Investment Banking,[email protected], orNannette Hechler-Fayd'herbe, Chief Investment Officer,International Wealth Management, Credit omCopyright and acknowledgements:See page 44 for copyright and acknowledgementinstructions, guidance on how to gain access to theunderlying data, and for more extensive contact details.Summary Edition Credit Suisse Global Investment Returns Yearbook 20203
Global Investment Returns YearbookAs the Global Investment Returns Yearbookenters 2020, we move beyond a second decadethat has proved highly rewarding for globalinvestors with annualized real equity returns of7.6% and a still robust 3.6% for bond investors.While it might be argued that equities are inmany respects getting back much of what theylost in the first decade of the millennium, makingreturns over the 20-year period look less outof keeping with the history books, the same cannot be said of bonds where the extended periodof premium real returns is unprecedented.The backdrop has of course remained one ofexceptionally low nominal and real interest ratessupporting the value of all financial assets both indeveloped and emerging markets, a legacy of theGlobal Financial Crisis. A number of governmentbond markets have nominal long bond yields stillrooted in negative territory, while many corporatesenjoy the related benefit of also borrowing atnegligible cost to retire equity, with centralbanks at the same time often happy to buythe paper they issue. Curious times indeed.4The value of a study that is shaped by morethan a century of financial history is its ability toremind us how exceptional conditions such asthese are and the need to check ourselves whenwe hear the typically costly phrase uttered “it’sdifferent this time.” An equity risk premium existsfor a reason; namely, the volatility of equity returns.Credit Suisse’s House View does indeed see ahealthy range of sources of potential volatility inthe year ahead – corporate profit margins peaking,high levels of corporate debt from the releveragingwe have seen, a polarized political backdrop in aUS election year, and monetary easing that hasall but run its course.Being paid to take the riskBeyond the immediate outlook, an ongoing andlively discussion remains as to what the equityrisk premium should be in the years ahead. Itassumes crucial significance with risk-free ratesthat are close to zero. In such circumstances,the return on equities is simply the payment fortaking risk. The authors continue to stress thatinvestors should assume a sober view of the likelyexcess returns equities can generate from here.
This is not just judged against the standardsof the last decade, but also by comparison withthe annualized 4.3% premium relative to billsobserved across the life of the Yearbook. A moretempered view is in many respects a natural consequence of the world of low real interest rates inwhich we are living. The study has shown that,when real rates are low, future returns on equitiesand bonds tend to be lower rather than higher.Shifts from one real interest rate environment toanother can see step changes in returns as investors adjust their future expectations. The resetsince the Global Financial Crisis as real rates collapsed has driven superior returns. Should a turnin the monetary cycle see an upward jump in realinterest rates, the reset in financial assets can bein the opposite direction. This is still a scenarioto keep in mind. The working premise that theauthors still believe investors should factor intotheir long-term thinking and modelling is an annualized equity premium relative to cash of around3½%. This is a consistent view they have heldthroughout this millennium. The prevailingstraight-jacket of low real interest rates providesno reason to change it.The ESG revolutionIf low real interest rates are influencing the levelof the equity risk premium, ESG investing is reshaping the nature of asset management. Investments with products linked to environment,social and governance (ESG) issues now exceedUSD 31 trillion. The 2020 Yearbook adds to thebody of thematic ESG work with a comprehensiveand objective examination of the challenges forinvestors integrating the considerations of ESGfactors into their investment approach.Conscious of the tendency of many to advocatefor or against rather than genuinely analyze themerits of ESG, the authors present conclusionsdrawn from a wealth of academic studies as wellas new work of their own. The study specificallyanalyzes the implications of exclusionary screening, the most prevalent of ESG approaches; therole of and, more specifically, limitations of therespective ESG ratings that invariably form thetoolkit for many ESG investors; and whetherESG screening genuinely enhances returns.For those pursuing exclusion-based strategies,the good news is that, over the longer term, suchstrategies need not compromise diversificationand relative risk-adjusted returns. The caveat isthat the shorter term can lead to significant deviation from such longer-term results, both positivelyand negatively. This could prove a material issuefor the providers of ESG investment products iftheir performance is judged on a shorter-termtime horizon. Quantitative strategies to mitigatesuch volatilities may assume a key significance.For those relying on ESG screening to enhancereturns and reduce risk, there is a vast literaturewith sometimes conflicting results depending ontime horizons and approaches taken. However,long-term evidence dating back more than 20years finds no conclusive evidence of this. Thisis in part due to lack of consistent data anduniversal agreement on what defines E, S and Gor perhaps it is a logical reflection of efficientmarkets. However, neither does there seem tobe a high price to be paid for ethical principles.The authors’ work shows that the way ESGinvestors can combine principles of responsibilitywith aims for material capital appreciation is toproactively use their powerful “voice.” They shouldalso harness the “voices” of others to engagedeeply with companies to drive change rather than“exit” through policies of exclusion. An active ratherthan passive approach to ESG drives returns.Factor investing meets ESG investingIf new ESG strategies are progressively dominatingthe investment landscape, factor investing andsmart beta strategies also remain very much invogue. According to FTSE Russell, 65% ofEuropean asset owners had adopted smartbeta strategies by 2019. The 2020 Yearbookrefreshes its analysis of factor returns around theworld. It is designed to probe more robustly intothe stability of a series of specific factors and theirpremia with the benefit of a long history of data.It is hard to ignore the very weak performanceof value since the Global Financial Crisis andextending into 2019 with yet another year ofnegative factor returns. It arguably stands out asanother consequence of the low interest rateworld which so rewards duration. However, andwith alarming circularity, a moot point is whetherESG investing and the weight of flows attractedto it intrinsically carry negative consequences forvalue when one considers the sectors most likelyimpacted by exclusions.The 2020 Yearbook is published by the CreditSuisse Research Institute with the aim of deliveringthe insights of world-class experts to complementthe research of our own investment analysts. Forprevious editions and other studies published bythe Research Institute, please ard KersleyHead Global Thematic Research,Credit Suisse Investment BankingNannette Hechler-Fayd'herbeChief Investment Officer,International Wealth Management, Credit SuisseSummary Edition Credit Suisse Global Investment Returns Yearbook 20205
Investing responsiblyInvestors are increasingly concerned about ESG(environmental, social and governance) issuesand asset managers are under growing pressureto show they invest responsibly. The GlobalSustainable Investment Alliance (GSIA, 2019)reports that, on a broad view, investment productslinked to ESG had a total value in 2018 of USD31 trillion. Industry projections for 2020 arearound USD 40 trillion.Exit and voiceESG investing takes many forms. One distinctionis between “exit” or divestment, based on ethicalscreening, and using “voice” through engagement. But approaches can differ markedly. Box 1overleaf contrasts the philosophy and tactics oftwo famous investors. Norway’s GovernmentPension Fund exits from companies deemedunethical, but engages when there is headroomto improve. Warren Buffett regards most ESGissues as being outside the remit of investmentprofessionals: in his view, ESG interventionsshould be the responsibility of governments.Voice is louder when many organizations areactive on topics that concern them, and investorsare increasingly forming coalitions to magnify theirimpact. The largest coalition is the Principles forResponsible Investing (PRI) with 2,372 investorswhose assets are worth USD 86 trillion. The 410signatories to Climate Action 100 (CA100 )have USD 42 trillion in assets under management. The Sustainability Accounting StandardsBoard (SASB) has 116 member supporters withUSD 40 trillion in assets. The 930 supporters ofthe Task Force on Climate-related Disclosures(TCFD) represent a market capitalization of USD11 trillion.The voices that are most heard are often thosewith the largest assets and the most votes. InJanuary 2020, the world's biggest investmentfirm, BlackRock, joined CA100 and releasedtwo public letters, one to CEOs and the other toclients, both centered on climate change. CEOLarry Fink (2020) expressed a clear convictionthat climate issues are reshaping finance and hedemanded that companies disclose sustainabilityinformation in line with SASB requirements andthat corporate reporting be aligned to TCFDguidelines. There is increasing support forcollective action on the environment.Divestment and exclusionEven divestment can be regarded as a form ofvoice. If enough investors shun a stock, this willlower its stock price. As Asness (2017) puts it,“to make the world a better place you want thesinning companies to sin less, not just to sufferin the stock market.”Summary Edition Credit Suisse Global Investment Returns Yearbook 20207
If investor actions lower the stock price, this willraise the company’s cost of capital. The sinfulcompanies will face a higher discount rate whenevaluating new investments, which means thatfewer sinful projects will show positive NPVs andfewer will be undertaken. Lower stock pricesmay also increase the likelihood of a takeoverbid, while also punishing executives where ithurts – through their compensation.Furthermore, “exit” can be a somewhat misleadingterm, suggesting only negative, exclusionaryscreening. While ESG investment typicallyinvolves screening, this may be of a positivenature. For example, a strategy of integrationcan include the systematic, explicit incorporation of ESG factors and rankings – good aswell as bad – into portfolio selection. Sustainability-themed investing can involve buying intothemes specifically related to environmental aspects such as clean energy, green technologyor sustainable agriculture.Seven strategiesThe Global Sustainable Investment Allianceidentifies seven broad ESG strategies. Figure 1shows their importance, broken down by region.The “Total” bar shows that ESG-managedinvestments had reached almost USD 31 trillionby start-2018.The chart shows that negative/exclusionaryscreening is the largest ESG category worldwide (and in Europe), representing 36% of theglobal total. Next comes ESG int
Coverage of the Summary Edition This report is a summary version of the full performance of 26 global markets Credit Suisse Global Investment Returns Yearbook and three transnational regions. 2020, which is available in hardcopy only and contains four deep-dive chapters of analysis leveraging this unique dataset. The first chapter