Credit Suisse

Global Investment
Returns Yearbook 2010
Research Institute
February 2010
Credit Suisse Research Institute:
Thought leadership from Credit Suisse Research
and the world’s foremost experts
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Contents
05 Emerging markets
13 Economic growth
21 Value in the USA
27 Country profiles
28 Australia
29 Belgium
30 Canada
31 Denmark
32 Finland
33 France
34 Germany
35 Ireland
36 Italy
37 Japan
38 Netherlands
39 New Zealand
40 Norway
41 South Africa
42 Spain
43 Sweden
44 Switzerland
45 United Kingdom
46 United States
47 World
48 World ex-US
49 Europe
50 Authors
51 Imprint/Disclaimer
CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010_2
CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010_3




The Credit Suisse Global Investment Returns Yearbook 2010
offers more than 100 years of data on financial market returns in
19 countries, putting into long-run perspective the current out-
look for asset prices at a time of global economic recovery and
high levels of country indebtedness. This year Elroy Dimson,
Paul Marsh and Mike Staunton of London Business School add
Finland and New Zealand to their database of long-term returns
and risks, alongside the 17 markets previously covered. The
scale of analysis extends far beyond what can be contained in
this Yearbook, so an accompanying volume (the Global Invest-
ment Returns Sourcebook) contains detailed tables, charts,
listings, background, sources and references for every country.
More specifically, in the context of the already strong
growth in emerging markets and the rebuilding of developed
economies, they examine two issues – first, what kinds of return
and risk levels should we expect from emerging market equities
and, second, what the relationship between stock returns and
economic growth is. While emerging market equity returns in
2009 were spectacular, this analysis suggests that, throughout
history, emerging market returns have been closer to developed
markets than many investors would now expect. The crucial
issue is the extent to which emerging markets have undergone a
structural improvement in terms of their risk/return profile and
the levels of economic growth they now enjoy.
The second article in the Yearbook helps to shed some
light here. While we observe a positive correlation between long-
term economic growth and stock returns, historic per capita
GDP growth has a negative correlation with both stock returns
and dividend growth. If anything, stock market moves are a
much better indicator of future GDP growth. In fact, paradoxi-
cally, an investment strategy of investing in countries that have
shown weakness in economic growth has historically earned
high returns. 2009 is a case in point.
In addition, the Yearbook contains an assessment by Jona-
than Wilmot, Chief Global Strategist for Investment Banking, of
the fundamental outlook for the US market in the context of a
globalized world. He notes that the US market is strongly linked
to emerging world growth as nearly a quarter of total US profits
and about 30% of S&P 500 sales are generated abroad. He
concludes that the outlook for US equities is positive, given
continuing globalization, emerging world growth and rapid tech-
nological change.
We are proud to be associated with the work of Elroy
Dimson, Paul Marsh and Mike Staunton, whose book Triumph of
the Optimists (Princeton University Press, 2002) has had a
major influence on investment analysis. The Yearbook is one of
a series of publications from the Credit Suisse Research Insti-
tute, which links the internal resources of our extensive research
teams with world-class external research.

Giles Keating
Head of
Private Banking Global Research
giles.keating@credit-suisse.com
Stefano Natella
Head of Global Equity Research,
Investment Banking
stefano.natella@credit-suisse.com



For more information on the findings of the Credit Suisse
Global Investment Returns Yearbook 2010, please contact
either the authors (see contact information on page 51) or:

Richard Kersley, Head of Equity Research Europe Product
at Credit Suisse Investment Banking,
richard.kersley@credit-suisse.com

Michael O'Sullivan, Head of UK Research,
Global Asset Allocation at Credit Suisse Private Banking,
michael.o'sullivan@credit-suisse.com

To order printed copies of the Yearbook and the Sourcebook,
see page 51.

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CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010_4
CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010_5
Emerging markets have been the hot topic of the past year, but
the story line has evolved. In the turmoil of 2008 and early
2009, they crashed along with, and more than, other risk as-
sets, shaking investors’ faith in the decoupling theory and in
diversification as a way of safeguarding portfolio values.
In the staggering equity market recovery since March 2009
(see Figure 1), the picture changed. Belief in decoupling was
back as emerging markets recovered sooner, faster and further,
and became the world’s engine of growth and recovery. The
belief that “future growth means higher returns” gained momen-
tum. Meanwhile, the financial crisis shattered the preconception
that the USA and other developed markets were relative safe
havens. Investors now viewed the risk gap between emerging
and developed markets as much smaller.
Are these perceptions correct, and have events been so
paradigm-changing that emerging markets are now the only
game in town? In this article, we seek to answer these questions
by putting the spotlight on the performance of emerging mar-
kets, and their role in a global equity portfolio.
In doing so, and consistent with the aims of the Yearbook,
we take a long-run view. A short-term focus on current percep-
tions and market beliefs can seriously detract from investment
performance. Those who follow the herd are destined to sell
markets after they have fallen, and to buy after a rise.
By examining markets over the longest possible period,
modern events can be put in their proper context. This is the role
of the Yearbook, with its 110 years of stock-market history now
expanded to cover 19 countries, and the even broader database
of 83 developed and emerging markets that we have assembled
for this and the accompanying article.
What is an emerging market?
There is no watertight definition of emerging markets. The term
was coined in the early 1980s by the International Finance Cor-
poration (IFC) to refer to middle-to-higher income developing
countries in transition to developed status, which were often
undergoing rapid growth and industrialization, and which had
stock markets that were increasing in size, activity and quality.
In practice, it is the major index providers, in consultation
with their clients, who define which markets are deemed emerg-
ing and which are developed. FTSE International distinguishes
between advanced and secondary emerging markets, while S&P
and MSCI identify a category of pre-emerging, frontier markets.
But the key distinction is between emerging and developed.
Index providers judge this using their own criteria, such as gross
domestic product (GDP) per capita, the regulatory environment,
and market size, quality, depth and breadth. Yet, despite the
different criteria, the resultant classifications are almost identical.
Emerging
markets
The opening years of the twenty-first century have been a lost decade for equity investors, with
the MSCI world index giving a return close to zero. However, emerging markets have been a
bright spot, with an annualized return of 10%. Looking ahead, can we expect this differential to
persist? And what role should emerging markets now have in investors’ portfolios? Answering
this question is crucial for all individuals who take a global view of stock-market opportunities.
Elroy Dimson, Paul Marsh and Mike Staunton, London Business School
CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010_6

Figure 1 lists the 24 countries currently classified as
emerging markets by the major index providers. MSCI views 22
of these as emerging, while the remaining two, Argentina and
Pakistan, are classified as emerging by FTSE, with both MSCI
and S&P deeming them to be frontier markets. The S&P and
FTSE taxonomies are otherwise almost identical to MSCI’s, the
exceptions being that S&P views Colombia as a frontier market;
FTSE upgraded Israel to developed in 2008, with MSCI follow-
ing in 2010; and FTSE promoted South Korea in 2009, while
S&P also categorizes it as developed, but retains it in their
Emerging Plus BMI index.
In the 30 or so years since emerging market indices first
appeared, there have been few upgrades to developed status.
Apart from Israel and Korea, currently in transition, only Portugal
and Greece have advanced, and Greece is now on some watch
lists for downgrade. Indeed, more emerging markets have been
downgraded to frontier than have been upgraded to developed.
S&P’s downgrades include Argentina, Colombia, Jordan, Nige-
ria, Pakistan, Sri Lanka, Venezuela and Zimbabwe. Clearly sev-
eral markets have failed to emerge as rapidly as once hoped.
Despite multiple factors used by index compilers to deter-
mine the boundary between emerging and developed status, a
single variable does an excellent job of discrimination: GDP per
capita. Using the most recent IMF projections for end-2009, we
ranked over 100 countries with active stock markets by their
GDP per capita. A cut-off point of USD 25,000 effectively
marked the boundary between emerging and developed mar-
kets. The only emerging market listed in Figure 1 with GDP per
capita higher than this was Israel (USD 29,700), which is al-
ready in transition to developed status. The only developed mar-
kets with lower GDP per capita are Portugal (USD 20,600) and
Korea (USD 16,500) which are a 2001 promotion and a transi-
tional case, respectively.
Although the term “emerging markets” dates back only to
the early 1980s, emerging markets are not new. Indeed, during
much of the nineteenth century, the United States would have
been regarded as a classic emerging market. The notion that
emerging status can largely be captured by a ranking of GDP
per capita allows us to revisit countries back in 1900 at the start
of the Yearbook coverage to see which stock markets existing
then might have been deemed emerging at that time.
To do this, we rank all countries by their estimated GDP
per capita in 1900 using Maddison’s historical database. We
assess the cutoff by taking the same percentile (30%) of the
distribution that corresponds to the USD 25,000 cutoff in 2010.
Using this criterion, only seven of the 38 countries with equity
markets in 1900 changed status over the following 110 years.
Five markets moved from emerging to developed: Finland, Ja-
pan and Hong Kong plus, more recently, Portugal and Greece.
Two moved from developed to emerging: Argentina and Chile.
Of the remaining 31 countries, 17 would have been deemed
developed in 1900 and remain developed today, while 14 were
emerging and are still in that category 110 years later.
Singapore, whose stock market opened in 1911, has also
moved from emerging to developed status. This gives a total of
six promotions over 110 years, plus Israel and Korea, currently
in transition. Thus, although most countries have grown consid-
erably in terms of GDP per capita, their relative rankings on this
metric have changed far more slowly.
There are numerous historical reasons why many emerging
markets have emerged slowly, and why others have suffered
setbacks. These include dictatorship, corruption, civil strife,
wars, disastrous economic policies and hyperinflation, and com-
munism. A combination of several of these factors helps to
explain why Argentina, which in 1900 had a GDP per capita
similar to that of France, and higher than Sweden and Norway,
Figure 1
Emerging markets’ performance since March 2009 and over the decade 2000Ũ09
Source: MSCI Barra; FTSE International
2
55
64
68
74
77
81
81
81
85
88
90
102
107
108
109
116
117
125
129
130
133
153
170
174
198
0 25 50 75 100 125 150 175 200
Morocco
Israel
Malaysia
Philippines
MSCI World
Pakistan
Chile
Czech Republic
Argentina
Egypt
China
Taiwan
Thailand
Peru
MSCI Emerging
South Africa
South Korea
Colombia
Mexico
Russia
Poland
Brazil
India
Indonesia
Turkey
Hungary
Return from 9 Mar–31 Dec 2009 Annualized return: 2000–09
2
55
64
68
74
77
81
81
81
85
88
90
102
107
108
109
116
117
125
129
130
133
153
170
174
198
0 25 50 75 100 125 150 175 200
Morocco
Israel
Malaysia
Philippines
MSCI World
Pakistan
Chile
Czech Republic
Argentina
Egypt
China
Taiwan
Thailand
Peru
MSCI Emerging
South Africa
South Korea
Colombia
Mexico
Russia
Poland
Brazil
India
Indonesia
Turkey
Hungary
Return from 9 Mar–31 Dec 2009 Annualized return: 2000–09

CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010_7
is now categorized by MSCI as just a frontier market. Many other
markets that were on the brink of becoming developed in the
early twentieth century, such as Hungary, Czechoslovakia, Po-
land and Russia, suffered the double blow of wartime destruc-
tion and the post-WWII communist yoke. Since the fall of the
Berlin Wall twenty years ago, these, and many other countries,
including China, have joined the ranks of the rapidly re-emerging
markets.
How important are emerging markets?
Emerging and frontier markets are far too big to ignore. They
account for more than 70% of the world’s population (over five
times that of developed markets), 46% of its land mass (twice
that of developed markets), and 31% of its GDP (almost half
that of developed markets). And, taken as a group, their real
GDP growth has been much faster than in developed markets.
In the following article, we cite a set of projections for fu-
ture GDP growth provided to us by PricewaterhouseCoopers as
an update to their recent report on economic growth (see page
14). These projections show the by now familiar consensus view
that key emerging markets, especially the BRICs, will continue
to grow rapidly, with China expected to displace the USA as the
world’s largest economy by around 2020, and with India over-
taking the USA by 2050.
These are, of course, just projections. While they broadly
reflect the consensus view, emerging markets have been acci-
dent prone in the past, and could suffer setbacks in future. Nor
should we write off the prospects for the developing world and
its stock markets. Nevertheless, it is clear that the world order is
changing fundamentally and quite rapidly.
Market weightings
In Forbes’ 2009 ranking of the top global companies, three of
the five constituents with the largest market capitalizations are
from emerging markets. No fewer than 11 of the top 100,
ranked by total market capitalization, are from China Ũ more
than from any other country in the world apart from the USA.
Perhaps surprisingly, therefore, the weighting of emerging
markets in the all-world indices published by MSCI and FTSE is
only some 12%. This is because these indices reflect the free-
float investable universe from the perspective of a global inves-
tor. In many markets, there are still restrictions on which stocks
foreigners can hold, with, for example, Chinese ‘A’ shares still
being inaccessible to most investors. Similarly, many large
emerging market stocks have only a small proportion of their
shares in public hands. Petrochina, which is currently China’s
largest company and the second largest oil company in the world
after ExxonMobil, has a free float weighting of just 2.5%.
Over an interval of three decades, Figure 2 compares the
weighting of emerging equity markets to that of developed mar-
kets on two criteria: in the upper panel market size is measured
by GDP, and in the lower panel by market capitalization. The
upper panel shows how the emerging markets’ share of global
GDP has grown discernibly to the point where a worldwide
GDP-weighted portfolio would now hold almost 30% of assets
in emerging markets. The lower panel confirms the dramatic
increase in the market capitalization of emerging markets from
some 2% in 1980 to 12% by end-2009.
Figure 2
Alternative emerging market weights, 1980–2010
Source: Adapted from Jacobs et al, "How Should Private Investors Diversify?", Mannheim
University 2009; GDP information is from Mitchell, Maddison and IMF; market capitalization
data is from S&P, MSCI and FTSE; frontier markets are excluded
(a) GDP weights

29
0%
25%
50%
75%
100%
1980 1985 1990 1995 2000 2005 2009
Developed: North America Developed: Europe
Developed: Asia Pacific Emerging markets
12
30
29
29
0%
25%
50%
75%
100%
1980 1985 1990 1995 2000 2005 2009
Developed: North America Developed: Europe
Developed: Asia Pacific Emerging markets
12
30
29

(b) Market capitalization weights

12
0%
25%
50%
75%
100%
1980 1985 1990 1995 2000 2005 2009
16
28
45
Developed: North America Developed: Europe
Developed: Asia Pacific Emerging markets
12
0%
25%
50%
75%
100%
1980 1985 1990 1995 2000 2005 2009
16
28
45
Developed: North America Developed: Europe
Developed: Asia Pacific Emerging markets
CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010_8

If the PwC projections are realized, today’s emerging and
frontier markets will become major constituents of the all-world
portfolio of 2050. Even if emerging market capitalization grew
only in line with GDP, it would account for around 30% of the
world total by 2050. However, the ratio of country capitalization
to GDP tends to rise as markets develop due to increased equity
issuance and IPOs. Markets tend to become more open to for-
eign investment and free-float rises as firms become less closely
held. Given these factors, today’s emerging markets could easily
account for 40%–50% of total world capitalization by 2050.
Looking ahead, one might decide to invest in national mar-
kets in proportion to each country’s GDP. However, this strategy
is impossible for global investors in total, who by definition must
hold each market in proportion to its free-float capitalization.
Long-term performance and emerging market indices
Emerging markets are often sold on the basis of superior returns
compared to developed markets, but does the long-term record
match up to these performance claims? The IFC pioneered the
first emerging market indices in 1981. Its IFCG (Global) indices,
later renamed S&P/IFCG, aimed to cover 70%Ũ80% of each
country’s capitalization. The S&P/IFCG Composite starts at
end-1984 with 17 constituent countries. We extended it back to
end-1975 using IFC country back-histories, and continue after
its demise in 2008 by linking it to its successor, the S&P
Emerging Plus BMI Index. The resulting 34-year record of
emerging market returns, while brief by Yearbook 110-year
standards, is lengthy by emerging market norms.
The dark blue line in Figure 3 shows that USD 100 in-
vested at end-1975 in emerging markets became USD 2,215
by end-2009, an annualized return of 9.5%. The red line shows
that an equivalent investment in developed markets proxied by
the MSCI World index gave a terminal value of USD 3,037 and
an annualized return of 10.6%. Thus, over the entire 34-year
period, emerging markets slightly underperformed.
However, this is not the full picture. In the late 1980s, the
S&P/IFCI (Investable) indices were launched, comprising
S&P/IFCG constituents that were legally and practically open to
foreign investors. MSCI and FTSE also introduced similar series.
The purple line in Figure 3 shows the MSCI Emerging Markets
index and the light blue line shows the S&P/IFCI Composite,
both with index values rebased to the level of the MSCI World on
the respective index start-dates. From launch through 1991, the
investable emerging market indices greatly outperformed the
S&P/IFCG and MSCI World, largely because they categorized
Korea and Taiwan as non-investable. From 1992 onward, there
have been no appreciable deviations between the performances
of the broader S&P/IFCG and the two investable indices.
Overall, emerging markets underperformed over the period
1976Ũ87, but outperformed on a cumulative basis since. How-
ever, the outperformance was smaller than some might imagine,
and has varied depending on the chosen end-date. For example,
by end-1998, emerging markets were behind their developed
counterparts. Then, until end-2002, they were mostly ahead, but
the gap was narrow. This was followed by five years of strong
performance, but by mid-2008 the gap was again small. In the
2009 recovery, emerging markets pulled ahead. It is possible
that long-term performance is flattered by the attention awarded
to emerging markets in the light of their recent high returns.
One can also ask who has earned this higher return from
emerging markets. Many investors chase past performance, and
buy more of an asset after its valuation has risen. Consequently,
money-weighted performance is inferior to index returns. In,
addition, while trading costs shrink when emerging markets are
hot, liquidity dries up and costs expand after a decline. This is a
further drag on achievable emerging market returns.
Figure 3
Emerging markets performance, 1975–2009
Source: Standard & Poor’s; MSCI Barra; Authors’ analysis.
*From 31 December 1975 until 31 December 1984, the S&P/IFCG EM Composite index has been constructed from the S&P/IFCG country back histories and weights; from 31 December 1984 until
31 October 2008, it is the S&P/IFCG Emerging Markets Composite index; from 31 October 2008 onwards, it is the S&P Emerging Plus BMI Index
2,215
9,446
3,037
11,420
100
1,000
10,000
1975 1980 1985 1990 1995 2000 2005 2009
S&P/IFCG EM Composite* 9.5% p.a. S&P/IFCI EM Composite
MSCI World Index 10.6% p.a. MSCI EM Index
S&P IFCG
Emerging* starts at
100 at end-75
MSCI Emerging starts:
rebased to end-87 value
MSCI World
S&P IFCI Emerging starts:
rebased to end-88 value
MSCI World
2,215
9,446
3,037
11,420
100
1,000
10,000
1975 1980 1985 1990 1995 2000 2005 2009
S&P/IFCG EM Composite* 9.5% p.a. S&P/IFCI EM Composite
MSCI World Index 10.6% p.a. MSCI EM Index
S&P IFCG
Emerging* starts at
100 at end-75
MSCI Emerging starts:
rebased to end-87 value
MSCI World
S&P IFCI Emerging starts:
rebased to end-88 value
MSCI World

CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010_9
Growth and stock returns
The recent excellent performance from emerging market equi-
ties, coupled with their robust GDP growth, has led to a resur-
gence of the “future growth means higher returns” story.
The first caveat is that, while emerging markets as a whole
have enjoyed higher economic growth, individual markets can be
exceptions. By 1980, IFC was compiling indices for 11 emerg-
ing markets. Of these, three grew more slowly than developed
markets over the next 30 years, while Argentina and Zimbabwe
suffered a real decline in GDP. The group as a whole enjoyed
faster growth, but outpaced developed markets by only 0.7%
per year. By end-1994, emerging market indices were being
calculated for a much wider set of 29 markets, which now in-
cluded China and Russia. Over the 15 years since, the GDP of
these 29 markets has grown 4% per year faster than for devel-
oped markets. Despite this truly impressive overall growth, four
emerging markets fell behind their developed counterparts.
The second, and fundamental caveat is that, perhaps sur-
prisingly, the fact that emerging markets are projected to grow
does not indicate that they will provide superior investment re-
turns. First, we are referring to growth in each country’s real
economy, which is not the same as growth in stock-market
capitalization. Second, even growth in market capitalizations may
not provide returns to investors. Third, global investors are often
unable to share in emerging market returns. Fourth, the compa-
nies that benefit from emerging market growth may be in the
developed world. Fifth, if there is a consensus that emerging
market growth will be higher, then this ought already to be re-
flected in stock prices. And last, the link between GDP growth
and stock returns is empirically far weaker than many suppose.
Turning to the first of these assertions, GDP reflects the
level of real activity in the economy, and could in principle grow
in the absence of a stock market. Only two decades ago, Ger-
many and Japan were cited as premier models of how GDP can
grow through bank, and not stock-market, financing. Con-
versely, the Alternative Investment Market in the UK has grown
significantly in market capitalization by attracting foreign compa-
nies that contribute to the GDP of countries other than Britain.
Second, increases in market capitalization are not the same
thing as portfolio appreciation. Market capitalization can grow
through privatization, demutualization, deleveraging, acquisition,
initial public offerings, equity issuance by listed companies, and
Ũ as mentioned above Ũ listings by companies that might other-
wise be traded elsewhere. None of these factors is necessarily a
source of added value for holders of listed shares.
Third, as discussed earlier, particular emerging market
companies may be non-investable or have limited free-float.
While government, family, cross-holding or domestic investors
may enjoy value increases, global investors are unable to share
fully in these companies’ performance.
Fourth, there is no clear correspondence between a com-
pany’s nationality and its economic exposure. Emerging market
companies that trade internationally may be dependent on
growth in the developed world. Similarly, multinationals in leading
economies may be relying on growth in emerging countries.
Fifth, the strong past and projected economic growth of
emerging markets has been common knowledge for many years.
It seems inconceivable that investors have not yet woken to this
story, or that the implications of this are not already fully im-
pounded in emerging market stock prices. Investors can be
expected to trade until there are about as many who think an
asset is overpriced as underpriced. For example, investors who
favor China can be expected to bid stocks up to a level that
impounds expected growth. If investors wait until there is a con-
sensus that growth will be high, they will have to pay more, and
that will impair portfolio returns.
Sixth, as we show in our companion article, the supposed
link between economic growth and stock-market performance is
statistically weak and often perverse. Unless an investor is
blessed with clairvoyance, there is no evidence that GDP growth
is useful as a predictor of superior stock-market returns.
Risk and return
Traditionally, emerging markets have been viewed as riskier than
developed markets. The credit crash, with its epicenter in devel-
oped markets, has shifted perceptions, and the risk gap is now
seen as smaller. Some have even claimed that developed mar-
kets are now riskier. To investigate this, we look at the data.
Figure 4 shows the historical return and risk from emerging
and developed markets. The gray bars show the emerging mar-
kets index, namely, the S&P/IFCG Composite from 1976Ũ86
and the MSCI Emerging thereafter, while the dark blue bars
show the MSCI World index of developed markets. The left hand
side of Figure 4 shows the returns by decade. In the late 1970s,
emerging markets gave similar returns to those of developed
markets, but they underperformed in the 1980s and 1990s. In
the 2000s, however, they beat developed markets by 10% per
year.
The equivalent bars on the right hand side of Figure 4 show
that the emerging markets index has been consistently more
volatile than the MSCI World. Although the gap has narrowed
somewhat, even over the most recent decade, emerging market
returns had an annualized standard deviation of 25%, compared
with 17% for the MSCI World. Holding a diversified portfolio of
emerging markets is still appreciably riskier than a diversified
portfolio of developed countries
Individual emerging markets (light blue bars) are on average
much riskier than individual developed markets (red bars), al-
though their risk has fallen steadily from the 1980s through to
the current decade. Despite this decline, over the most recent
decade, the average emerging market had a volatility of 32.5%
versus 23.5% for the average developed market. Indeed, it is
this volatility that explains why the equally weighted average
emerging market return can diverge so much from the weighted
index return (compare the light blue bars with the gray bars on
the left hand side of the figure). This is due to the outlying re-
turns from a few, smaller emerging markets.
For global investors, the high volatility of individual markets
does not matter, as long as they hold a diversified portfolio of
emerging markets. Indeed, even the higher volatility of the
emerging markets index need not in itself concern them. What
matters is how much an incremental holding in emerging mar-
kets contributes to the risk of their overall portfolio. This is
measured by the beta or sensitivity of the emerging markets
index to global markets.
CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010_10



While emerging markets sometimes decouple from devel-
oped economies, they remain sensitive to global markets. Figure
5 examines months during 2000Ũ09 in which the MSCI World
boomed or collapsed. The upper panel shows the five worst
months, and the lower panel, the five best. In bullish months,
emerging markets tend to outperform, and in bearish months to
underperform: their beta over the decade was 1.30. This above-
average beta is consistent with emerging markets’ poor relative
performance during the tech-crash and credit crunch, and supe-
rior recoveries after the lows of March 2003 and March 2009.
A higher beta implies a higher expected return. In the re-
lated Sourcebook, we argue that investors can expect an annu-
alized long-run risk premium relative to cash of 3%Ũ3½% from
global equities. A beta of 1.3 would imply a higher premium of
approximately an extra 1½% per annum. As a long-run estimate,
this represents the top end of our expectations, as emerging
markets are likely to mature and become more like developed
markets, and for the technical reason that future betas tend to
be closer to 1.0 than historical estimates.
We should therefore expect a modestly higher return from
emerging markets. This higher return arises not from the spuri-
ous growth argument, but from a financial argument as old as
time, namely that investors require higher returns for higher risk.
Diversification benefits
Diversification benefits provide a strong motive for investing
across both developed and emerging markets. The benefits are
greatest when correlations between markets are low. Figure 6
shows how rolling five-year correlations have changed over time.
The light blue line shows that the average correlation between
pairs of emerging markets has risen sharply from close to zero to
0.55 today. But despite this rise, 0.55 remains a low correlation,
showing there are still huge benefits to holding diversified portfo-
lios of emerging markets, rather than selecting just one or two.
The other lines in Figure 6 reveal a similar pattern. The dark
blue line shows the average correlation between pairs of devel-
oped markets, while the gray line shows the average across all
pairs of emerging and developed markets. However, for a global
investor, the key metric is the red line showing the correlation
between the emerging markets index and the MSCI World.
Figure 6 shows that all correlations have risen sharply, with
a step jump upward over the most recent five-year period. Two
factors are at work. First, there has been a secular increase in
globalization and growing interconnectedness between markets.
Second, it is well known that correlations increase greatly during
turbulence or following big downside moves. This explains the
recent upward jump, since during the credit crash, all risk assets
fell together, causing investors to complain that diversification
had let them down just when they needed it most.
For investors who were forced sellers at the market lows of
autumn 2008 or March 2009, this was a major issue. However,
knowledge of long-term capital market history should have
warned them that precipitous declines are to be expected from
time to time, and that when they occur, most risk assets fall
together. For longer term holders, however, while the expecta-
tion of such episodes does lower the overall benefits of diversifi-
cation, the loss is quite small.
Figure 4
Emerging market risk and return, 1976–2009
Source: MSCI Barra; S&P; Authors’ analysis
0%
10%
20%
30%
40%
1976–79 1980s 1990s 2000s 1976–79 1980s 1990s 2000s
Annualized return Annualized standard deviation
MSCI World index Emerging markets index
Average developed market Average emerging market
0%
10%
20%
30%
40%
1976–79 1980s 1990s 2000s 1976–79 1980s 1990s 2000s
Annualized return Annualized standard deviation
MSCI World index Emerging markets index
Average developed market Average emerging market
Figure 5
Returns in extreme months, 2000–2009
Source: Index returns in the most extreme months for the World index using data from MSCI
17%
17%
9%
11%
14%
í15%
í6%
í11%
í17%
í27%
12%
10%
9%
9%
8%
í9%
í10%
í11%
í12%
í20%
í30% í20% í10% 0% 10% 20%
MSCI EM MSCI World
17%
17%
9%
11%
14%
í15%
í6%
í11%
í17%
í27%
12%
10%
9%
9%
8%
í9%
í10%
í11%
í12%
í20%
í30% í20% í10% 0% 10% 20%
MSCI EM MSCI World
CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010_11
This analysis therefore suggests that the most recent cor-
relation estimates shown in Figure 6 almost certainly overstate
prospective correlations over the next five years Ũ unless mar-
kets encounter a further shock of the same magnitude as the
credit crash. But even taken at face value, the correlation of
0.91 between developed and emerging market indices still indi-
cates scope for meaningful risk reduction from diversification
between emerging and developed markets.
The attractions of investing in emerging markets depend on
an investor’s starting point. Consider an equity investor whose
holdings are entirely in developed markets. A small position in
emerging markets will disproportionately reduce portfolio volatil-
ity. For example, a 1% reallocation to emerging equities will
reduce portfolio volatility by more than 1%. Even if emerging
equities offer the same expected return as developed equities, it
is worth reallocating some of a portfolio to emerging markets.
The position of an investor located in an emerging market,
whose holdings are entirely in that country’s market, is different.
For this individual, there is a potentially large benefit from reallo-
cating assets to other worldwide markets. The reduced volatility
of a global strategy is so appealing that it will be worth pursuing
even if the expected return from foreign markets is lower.
Understanding the emerging world
Emerging markets are now mainstream investments with a key
role and essential position in global portfolios. Furthermore, the
importance of today’s emerging markets will continue to rise, as
will their weightings in world indices. Emerging markets, both
individually and as an asset class remain riskier than developed
markets, but the gap has narrowed. Meanwhile, they offer diver-
sification benefits through exposure to different economies and
sectors at different stages of growth. This can help to reduce
overall portfolio risk when emerging markets are blended with a
portfolio of developed market securities.
At the same time, the case for emerging markets is often
oversold. Almost certainly, the implications of their faster growth
are already impounded in market valuations. Their longer term
returns have been less stellar than many imagine. And while they
have outperformed developed markets by 10% per annum over
the last decade, it would be unwise to expect this to persist. On
the assumption that emerging markets have not currently over-
reached themselves, we estimate that, over the long run, their
expected outperformance will be closer to 1½% per annum Ũ
and this reflects compensation for their higher risk.
Nor would it be sensible to write off the prospects for de-
veloped markets, despite the gloom surrounding their current
state. They should remain the main focus of analytical effort, as
global investment will remain weighted towards today’s devel-
oped markets for at least the next two decades. However, it is
clearly no longer possible to assess developed market prospects
without a deep understanding of the emerging world.
Figure 6
Correlations between markets, 1976–2009
Source: The rolling 5-year correlations were computed by the authors using data from S&P and
MSCI Barra
0.55
0.64
0.8!
0.9!
0.0
0.2
0.4
0.6
0.8
!980 !985 !990 !995 2000 2005 2009
A»orugo EM:EM A»orugo DM:DM
A»orugo EM:DM MSCl Wor|d:EM |ndox
0.55
0.64
0.8!
0.9!
0.0
0.2
0.4
0.6
0.8
!980 !985 !990 !995 2000 2005 2009
A»orugo EM:EM A»orugo DM:DM
A»orugo EM:DM MSCl Wor|d:EM |ndox

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CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010_12
CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010_13
The past year saw a remarkable recovery in global equities with
the MSCI world index rising 74% from its March low. This was
partly fueled by relief that financial Armageddon had been
averted and partly by anticipation of a rapid return to growth.
However, these market movements must have seemed deeply
puzzling to the average citizen of the developed world, where
economies remained weakened and fragile.
Last year also saw a two-speed world. Emerging market
equities greatly outpaced their developed counterparts, while
parts of the emerging world, especially China, enjoyed robust
growth, while other economies still languished (see Table 1).
These observations raise two key questions. First, is eco-
nomic growth a reliable predictor of future equity returns? Sec-
ond, are equity markets a reliable predictor of future growth?
To many investors the answer to the first question is self-
evident. They have decided to “follow the growth” because
“higher growth means higher returns”. However, this strategy is
now more expensive to implement. Switching from the higher
growth markets in the top part of Table 1 to the more distressed
economies shown in the lower part would today buy less than
three-quarters of the holdings in “growth” markets that could
have been purchased in March 2009. Switching in the other
direction would today buy a 35% larger holding in the distressed
economies than could have been bought in March 2009. As so
often happens, just when growth looks more assured, stock
prices have risen. The growth markets offer participation in ex-
panding economies, but at a higher price. If prices go too high,
then the slow-growing markets will offer better value.
Looking back, many high-growth economies have enjoyed
high equity returns, and vice versa. If we were clairvoyant, we
would favor equities in countries that are destined to prosper.
Economic
growth
In 2009, stock markets rallied. Should investors now focus on countries that still hope for recov-
ery, or on those that are experiencing high economic growth? This is the old value-versus-growth
dilemma, but on a global scale. Looking at 83 countries over 110 years, we find no evidence
that investing in growth economies produced superior returns. However, we do find that stock
markets incorporate predictions of future economic growth. When markets recover, economies
tend to follow.
Elroy Dimson, Paul Marsh and Mike Staunton, London Business School
Table 1
Real GDP growth and annualized equity returns
Source: IMF, DMS, S&P. All data is local currency, real terms, annualized.
(* In the final column, Indonesia is from 1990, and China and Sri Lanka are from 1993)
Jan–Dec 2009 2000–2009 1985–2009*
Country GDP % Return % GDP % Return % GDP % Return %
China 8.7 68 9.9 7.7 9.9 2.6
India 5.6 72 7.0 9.5 6.2 11.2
Indonesia 4.0 96 5.1 6.8 4.7 0.4
Sri Lanka 3.0 111 4.9 9.4 4.7 2.2
Brazil Ũ0.4 67 3.2 13.9 2.9 11.1
France Ũ2.3 28 1.5 Ũ1.8 1.9 8.7
USA Ũ2.5 25 1.9 Ũ2.7 2.8 7.3
UK Ũ4.8 28 1.8 Ũ1.0 2.4 6.7
Germany Ũ4.8 24 0.8 Ũ2.5 1.8 6.1
Japan Ũ5.3 9 0.7 Ũ4.8 1.9 0.2
CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010_14

But we are not clairvoyant. Should we then buy equities in coun-
tries that, prior to our purchase date, have experienced eco-
nomic growth? In other words, does a record of high growth
indicate that stock returns will subsequently be high? Or by
following such a strategy, do we end up overpaying for growth.
Value and growth investors have been grappling with these
kinds of dilemmas for decades when they select stocks within
equity markets. We are focusing here on the analogous problem
of selecting between growth and value economies.
The plan of our article is therefore as follows. We start with
a review of longer term trends in, and projections of, economic
growth. The economic landscape is undergoing a transformation,
and we need to interpret the impact of this for portfolio strategy.
We then address our first question, which is whether
economic growth is a reliable indicator of future equity returns.
We draw on the Yearbook’s extensive database, analyzing over
3,000 country years of data to show that, over the long haul,
there is no clear relationship between changes in real GDP per
capita and stock market performance; and over the short term,
there is no simple formula that can guide investment decisions.
Our second question is whether stock markets can predict
economic growth. We show that, across countries and years,
stock market returns provide a useful indication of future growth
in GDP per capita.
The changing economic landscape
The stock markets of the G7 countries account for 71% of global
equity market capitalization. Currently, emerging markets repre-
sent only 12% of global capitalization, but their national econo-
mies are growing fast. These countries will become increasingly
important to investors as their stock markets grow in value.
In an analogy with the G7 nations, the seven emerging
markets of China, India, Brazil, Russia, Mexico, Indonesia and
Turkey are sometimes referred to as the E7. A recent PwC
report compares the E7 with the G7 nations with projections to
2050. The authors, John Hawksworth and Gordon Cookson,
have provided us with updated projections based on the latest
available data. They conclude that the E7 economies will be
more than 50% larger than the current G7 by 2050. China is
expected to overtake the USA in about a decade from now,
while India will have overtaken the USA by 2050.
Figure 1 presents the past and projected GDP for selected
countries. Each country is represented by a color, and for each
year, countries are ranked from the largest to the smallest GDP.
Note the predicted ascent of China and India, and the forecast
waning of European countries. The magnitude of the GDPs at
each date is represented by the size of the bubbles. Although
the GDP of developed economies is expected to rise, China and
India migrate from being a speck on the chart in the last century
to being among the economies that are forecast, by the middle
of this century, to be centers of economic wealth and growth.
As we noted in the previous article, these are simply projec-
tions, but they do signal a revolution in the global balance of
economic power. Economic growth patterns are changing the
shape of our world and our investment universe. We need to
understand the implications of this for investment strategy.

Figure 1
Developed and emerging market GDPs, 1950–2050
Source: Data from World Bank and The World in 2050, PricewaterhouseCoopers 2008; updates from John Hawksworth and Gordon Cookson; authors’ analysis
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CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010_15
Economic growth and stock-market performance
The conventional view is that, over the long run, corporate earn-
ings will constitute a roughly constant share of national income,
and so dividends ought to grow at a similar rate to the overall
economy. This suggests that fast-growing economies will ex-
perience higher growth in real dividends, and hence higher stock
returns. Consistent with this, the 19 Yearbook countries had a
positive correlation (0.41) between their 110-year real growth
rate for overall GDP and their annualized real equity returns.
However, growth in GDP has two components: growth in
per capita GDP and population increases. While many European
countries, such as the UK, France, Belgium, and Ireland, experi-
enced modest (50%–60%) population growth between 1900
and 2009, the New World grew much faster. The US population
expanded by 308%, and the increase was even larger in Austra-
lia (479%), New Zealand (423%), Canada (524%), and South
Africa (953%). In common with other researchers, when making
long run economic growth comparisons, we therefore focus on
changes in GDP per capita. This controls for population growth
thus providing a more direct measure of growth in prosperity.
Figure 2 ranks the real equity return of the 19 Yearbook
countries over the period 1900–2009, from lowest to highest. It
shows that there is a high correlation (0.87) between real equity
returns and real dividend growth across the 19 countries. How-
ever, the claim that real dividends grow at the same rate as real
GDP is clearly incorrect. Real dividend growth has lagged behind
real GDP per capita growth in all but one country, averaging just
–0.1%, and the correlation between the two is –0.30. Even
more importantly, Figure 2 shows that the supposed association
between long-run real growth in GDP per capita and real equity
returns is simply not there (the correlation is –0.23).
There are many possible explanations for these findings.
For example, Rob Arnott and William Bernstein have pointed out
that the growth of listed companies contributes only a part of a
nation’s increase in GDP. In entrepreneurial countries, new
private enterprises contribute to GDP growth but not to the
dividends of public companies. There is thus a gap between
long-term economic growth and dividend and earnings growth. It
also helps explain why the relationship between GDP growth and
stock returns is so noisy. The relationship may be further com-
plicated by the fact that successful countries attract immigrants,
which impacts on their GDP per capita.
Similarly, Jeremy Siegel has pointed out that the largest
firms quoted on most national markets are multinationals whose
profits depend on worldwide, rather than domestic, economic
growth. He has also argued that markets anticipate economic
growth, but that in some cases (e.g. Japan) investors’ expecta-
tions subsequently proved overly optimistic.
Whatever the explanation, the absence of a clear-cut rela-
tionship between economic growth and stock returns should give
investors pause for thought. But at the same time, this finding
should emphatically not be interpreted as evidence that eco-
nomic growth is irrelevant. The prosperity of companies, and the
investors who own them, will clearly, at any point in time, depend
on the state of both national economies and the global economy.
To verify this, we look next at the relationship over time between
stock returns and GDP growth focusing on the US market.
Figure 2
Returns, dividends, and GDP growth, 1900–2009
Source: Dimson, Marsh, Staunton, Triumph of the Optimists; authors’ updates
-4
-2
0
2
4
6
8
Ita Bel Ger Fra Spa Ire Jap Nor Swi DenNet Fin UK Can NZ US SweSAf Aus
Annualized real rate (%)
Real equity return Real dividend growth Real GDP per capita growth
-4
-2
0
2
4
6
8
Ita Bel Ger Fra Spa Ire Jap Nor Swi DenNet Fin UK Can NZ US SweSAf Aus
Annualized real rate (%)
Real equity return Real dividend growth Real GDP per capita growth
CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010_16


Stock returns and GDP growth over time
Figure 3 shows the contemporaneous impact of quarterly GDP
changes on the level of the US stock market. The line of best fit
(in blue) has a slope coefficient of 0.41, indicating that a 2.5%
increase in the GDP growth rate is associated with an equity
return that is higher by one percentage point (0.41 x 2.5% =
1.0%). The regression relationship is statistically significant (the t-
statistic is 3.90) and the adjusted R-squared is 5%.
In practice, this contemporaneous relationship cannot be
used to predict investment returns. This is because GDPs are
not published until after the quarter, and are then extensively
revised, with revisions that are often of the same magnitude as
the announced growth figure. The final figures plotted in Figure
3 would not have been known until several quarters later.
A more formal analysis is presented in Table 2. GDP data
for the same quarter explains a useful proportion of this quar-
ter’s equity return (i.e., it has an R-squared of 5.4%). GDP data
for the prior quarter explains something (2.5%), too. But when
regressing returns on the GDP change from two quarters earlier,
the model’s explanatory power drops to zero (see the last col-
umn). In summary, accurate predictions of GDP growth could be
informative about stock market movements, but realized GDP
growth rates are no use for predicting quarterly market returns.
Figure 4 extends our analysis to longer investment intervals
and multiple markets. We compile data on 83 national markets:
the 19 Yearbook countries plus an additional 64 stock markets
for which total returns (including dividends) are available. For 20
different countries, there is well over half a century of data; for
40 there is at least a quarter century of data; for 78 there is
more than a decade of data; and for five the dataset spans just
ten years. Our world equity index has a 110-year history
Figure 4 plots per capita real GDP growth against real eq-
uity returns over 183 investment periods, each lasting a decade.
Over the 1970s (in gray), there was a correlation across 23
countries of 0.61. During the 1980s (in light blue) there was a
correlation across 33 countries of 0.33. In the 1990s (in dark
blue), the correlation across 44 countries was –0.14. Finally,
over the 2000s (in red) the correlation across 83 countries was
0.22. Pooling all observations in Figure 4, the low correlation
(0.12) between growth in per capita real GDP and real equity
returns is statistically insignificant. The R-squared of one percent
(0.12
2
) reveals that 99% of the variability of equity returns is
associated with factors other than changes in GDP. Even over
an interval of a decade, the association between economic
growth and stock-market performance is tenuous.
To sum up, we find no evidence of economic growth being
a predictor of stock market performance. Our second question is
whether stock markets are informative about future growth.
Does the market predict economic growth?
To address our second question, we blend our single country
perspective (Figure 3) with our longer-term international analysis
(Figure 4). We run regressions to predict annual GDP growth
from equity returns for all 83 individual markets and for the world
index Ũ for brevity, we report only the latter Ũ and for a pooled
sample of all markets (measured here in common currency, USD
terms) commencing in both 1900 and 1950.
Figure 3
US equity returns vs. GDP growth, 1947–2009
Source: Quarterly data from US Bureau of Economic Analysis; Dimson, Marsh, Staunton
-30
-20
-10
0
10
20
30
-15 -10 -5 0 5 10 15 20
Change in real GDP (%)
Real equity
return (%)
-30
-20
-10
0
10
20
30
-15 -10 -5 0 5 10 15 20
Change in real GDP (%)
Real equity
return (%)
Table 2
Regression of US returns on quarterly GDP growth
Source: US Bureau of Economic analysis; Dimson, Marsh, Staunton
Return during the
quarter
GDP growth in
same quarter
GDP growth in
prior quarter
GDP growth 2
quarters before
Slope coefficient 0.41 0.29 –0.00
(t-statistic) (3.91) (2.72) (–0.04)
No. of quarters 250 249 248
Adjusted R-squared (%) 5.4 2.5 –0.0
Figure 4
Global equity returns vs. GDP growth, 1970–2009
Source: S&P; MSCI Barra; Morningstar; Global Financial Data; Mitchell; Maddison; DMS
-20
-10
0
10
20
30
-6 -4 -2 0 2 4 6 8 10
Annualized GDP per capita growth %
2000s 1990s 1980s 1970s
Annualized real equity return
-20
-10
0
10
20
30
-6 -4 -2 0 2 4 6 8 10
2000s 1990s 1980s 1970s
Annualized real equity return %
-20
-10
0
10
20
30
-6 -4 -2 0 2 4 6 8 10
Annualized GDP per capita growth %
2000s 1990s 1980s 1970s
Annualized real equity return
-20
-10
0
10
20
30
-6 -4 -2 0 2 4 6 8 10
2000s 1990s 1980s 1970s
Annualized real equity return %
CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010_17
We have already noted that countries do not issue GDP
statistics at the year-end, and instead publish delayed estimates
that are subject to revision. We find that there is no relationship
between annual GDP growth rates and contemporaneous stock
market returns. Regressions of individual countries’ annual GDP
growth on local-currency real returns, have an adjusted R-
squared that is on average zero and in most cases negative.
To infer GDP expectations from equity returns in prior
years, we therefore estimate regressions that employ prior-year
market returns to predict GDP growth. For nearly all of the 83
countries, the equity return over the prior year is positively re-
lated to subsequent GDP growth. The t-statistic is on average
1.84, which is high considering how short many time series are.
Table 3 reports regression coefficients for the world index
and for a pooled dataset of all individual markets. The world
index reveals a relationship between GDP growth and equity
return in the preceding year, with a highly significant t-statistic
(2.8). The market’s performance in the year before that is not
significant. For individual markets, the pooled regression shows
that, as for the world, there is a highly significant relationship
between GDP growth and the equity return in the previous year.
The coefficient on the return two years previously is closer to
zero and, for the full 110-year period, non-significant. Local
currency regressions for the 83 individual countries (not reported
here) have an adjusted R-squared that averages 13%.
In Table 4, we analyze portfolio performance based on his-
torical GDP growth measured over a prior interval. For each
year, we assemble quintiles ranging from the lowest to the high-
est growth economies. We use these GDP quintiles to make
portfolio decisions based solely on knowledge of past GDPs.
There is no evidence of outperformance by high-growth econo-
mies. Historically, the total return from buying stocks in the low-
growth countries has equaled or exceeded the return from buy-
ing stocks in the high-growth economies.
There has been greater variability from investing in econo-
mies with particularly high or low growth than from mid-ranked
economies. Consequently, over the entire 110 years, the Sharpe
Ratio (the ratio of excess return on the portfolio to its annual
standard deviation) is relatively similar across strategies, as can
be seen in Table 5. Only in the post-1972 subsample (the
rightmost column), when stocks in low-growth economies sub-
sequently performed well, is there a record of superior risk-
adjusted outperformance. Much of this outperformance may be
attributed to the emerging markets.
The patterns of equity returns reported in these tables are
similar whether economic growth is measured over an interval of
one, two, three, four, or five years. The results are robust to the
length of holding period and to whether performance is meas-
ured in common currency (e.g. USD) or in real local currency.
Profits from prescience
Buying growth markets fails to outperform because markets
anticipate economic growth. But if that is the case, a perfect
forecast of next year’s economic growth could be very valuable.
In Table 6, we calculate the US dollar return that would have
been achieved by an equity investor who presciently buys each
portfolio with foresight about next year’s GDP. This hypothetical
strategy did, indeed, offer outstanding performance.
Table 3
Regression of annual GDP growth on equity returns
Source: Dimson, Marsh and Staunton analysis using data from S&P; MSCI Barra; Morningstar;
Global Financial Data; Mitchell; Maddison; DMS. All data in USD.
(* Regressions using country/year dummies.

99.9% significance level.
Ũ
not significant at 95%)
Independent variable
measured in real USD
World index
1900–2009
All markets
1900–2009*
All markets
1950–2009*
Return 1 year before 0.10


0.01

0.02


Return 2 years before –0.06
Ũ
0.00
Ũ
0.00


No. of observations 108 3249 2337
Adjusted R-squared (%) 6 6 30
Table 4
Returns on markets ranked by past GDP growth
Source: Dimson, Marsh and Staunton analysis using data from S&P; MSCI Barra; Morningstar;
Global Financial Data; Mitchell; Maddison; DMS. All data in USD.
(* GDP data commencing as close as possible to 1900 or to 1972)
GDP ranked by 5-
year past growth
19 countries
1900–2009
83 countries
1900–2009*
83 countries
1972–2009*
Lowest growth 10.9 14.1 25.1
Lower growth 9.3 11.7 18.6
Middling growth 10.1 10.6 16.2
Higher growth 7.8 9.0 11.9
Highest growth 11.1 13.1 18.4
Table 5
Sharpe ratios for markets ranked by past growth
Source: Dimson, Marsh and Staunton analysis using data from S&P; MSCI Barra; Morningstar;
Global Financial Data; Mitchell; Maddison; DMS. All data in USD.
(* GDP data commencing as close as possible to 1900 or to 1972)
GDP ranked by 5-
year past growth
19 countries
1900–2009
83 countries
1900–2009*
83 countries
1972–2009*
Lowest growth 0.51 0.56 0.85
Lower growth 0.53 0.61 0.84
Middling growth 0.59 0.57 0.73
Higher growth 0.47 0.52 0.57
Highest growth 0.55 0.60 0.69
Table 6
Returns on markets ranked by future GDP growth
Source: Dimson, Marsh and Staunton analysis using data from S&P; MSCI Barra; Morningstar;
Global Financial Data; Mitchell; Maddison; DMS. All data in USD.
(* GDP data commencing as close as possible to 1900 or to 1972)
GDP ranked by 1-
year future growth
19 countries
1900–2009
83 countries
1900–2009*
83 countries
1972–2009*
Lowest growth 7.5 9.5 12.0
Lower growth 9.1 9.6 11.7
Middling growth 10.1 10.6 15.8
Higher growth 10.7 13.0 20.9
Highest growth 11.7 13.7 27.9
CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010_18

On the left-hand side of Table 6, we display the annualized
returns for quintiles 1–5 of the 19 Yearbook countries; in the
middle the corresponding quintile returns since 1900 for all 83
countries; and on the right-hand side the quintile returns since
1972 for the 83 countries. For the 19 Yearbook countries,
buying the equities of next year’s highest-growth economies
would have generated an 11.7% annualized real return, com-
pared to 7.5% for next year’s lowest-growth economies. For all
83 countries over the period 1972Ũ2009, buying the equities of
next year’s highest-growth economies would have generated an
annualized real return of 27.9%, compared to 12.0% for the
lowest-growth economies.
Accurate predictions of future economic growth would
therefore be of great value. In reality, however, investors cannot
divine future growth. They do not even know the growth rate for
a year that has recently ended because national statistical of-
fices require sometimes lengthy periods to finalize the year’s
GDP. Investors have no choice but to extrapolate economic
growth into the future. This is tricky because markets already
anticipate future growth, and it is challenging to beat investors’
consensus growth predictions.
Why has low growth beaten high growth?
The recent economic downturn has been the deepest in many
countries since the 1930s. Yet from their low in early March
2009, most stock markets have rallied sharply and, for some
countries, economic growth has been restored.
Many investors have reverted to the view that investing in
fast-growing economies will generate superior equity returns.
But historically, that strategy has failed to deliver superior per-
formance. Over the long run, there is not a positive association
between a country’s real growth in per capita GDP and the real
returns from its stock market. In recent decades, investors have
historically earned the highest returns Ũ though with greater risk
Ũ by adopting a policy of investing in countries that have shown
recent economic weakness, rather than investing in those coun-
tries that have grown most rapidly.
What explains the disappointing returns from investing in
high-growth economies? The simplest explanation is that, in a
horse race between low-growth and high-growth economies,
there had to be a winner, but the outcome may simply be a
matter of luck. For example, low-growth economies may have
had resources that Ũ with hindsight Ũ were undervalued by in-
vestors; or they may have had a high probability of collapse,
whereas the outcome was survival by more of them than inves-
tors had anticipated.
A second, behaviorally motivated, explanation is that inves-
tors shun the equities of distressed countries, and bid up the
prices of assets in growing economies to unrealistic levels. Even
if this over-valuation of growth assets is apparent to sophisti-
cated investors, it is hard to take advantage of it. Short-selling
the stocks of fast-growing countries may be costly and risky.
A third explanation is that stock prices reflect projected
cash flows and their riskiness. When an economy grows, divi-

CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010_19
dends are likely to rise and risk is reduced, and the equity risk
premium shrinks. So stocks should appreciate, partly because
the forward-looking equity risk premium has become smaller.
With a smaller equity risk premium, subsequent equity returns
should be expected to be lower. In other words, if the market
functions effectively, stock returns should decline after economic
growth, and should increase after economic decline. That is
what we find.
At the same time, the stock market discounts anticipated
economic conditions. In other words, if the market is effective,
we should also find that stock prices are a predictor of future
economic growth. That, too, is what we find.
Markets are a potentially useful leading indicator of future
economic growth, though their predictive power is limited. If
future growth were known, then investors should buy the stocks
of these growing economies. Past economic growth, however,
does not act as a leading indicator of superior stock returns.
Seeking value in international markets
This article has revealed the consistency between strategies that
have performed well within markets and those that have per-
formed well across markets. Within markets, value investing has
prevailed. Value stocks – which have low growth prospects and
a low share price relative to fundamentals – have achieved supe-
rior long-run returns. Growth stocks – which have a share price
that is high relative to fundamentals – have had inferior long-run
returns.
Internationally, investors can choose between low-growth or
high-growth countries. The low-growth countries are making
poor progress economically or are experiencing setbacks that
may be overcome. The high-growth countries are expected to
achieve speedy and sustained economic advancement. We find
that investing in economies that have achieved high growth rates
has failed to deliver better long-run investment returns.
This does not mean that investors should avoid growth in-
vesting. Within a single country’s stock market, investors gain
diversification benefits from holding a broad spread of securities
in their portfolios. The same is true internationally. Investors
should ensure that their global portfolio is diversified across slow
and fast-growing economies.
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CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010_20
CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010_21
Persistence and overshooting are the two most striking features
of the long-run US data. Trend GDP growth has gradually de-
clined from 3¾% per annum in the early 19th century to below
3% per annum more recently, as population growth has slowed.
But productivity, profits and equity returns exhibit roughly linear
growth for at least the last 100 years, (about 2% per annum for
the first two, over 6% p.a. for the latter).
Cyclical fluctuations around these long trends can be very
large. At the peak of the tech bubble in March 2000, real equity
returns were 2.4 standard deviations above trend, or about 13
years of trend performance ahead of themselves, worse than in
1929. At their extreme trough in 1932, real returns were 3.4
standard deviations below trend, some 19 years behind. And
particularly extreme falls in corporate earnings were experienced
from 1916 to 1921, and in the banking panic of 2008/9.
Despite these huge overshoots, the core trends have sur-
vived Ũ among other things Ũ several major banking panics, four
major oil shocks, three depressions, two world wars, nuclear
competition with the Soviet Union, protectionism, the swinging
sixties, race riots, imperial overstretch in Vietnam, big govern-
ment, small government and countless prophecies of decline.
Talk of American decline is back in fashion and claims that
US equities are expensive after their dramatic post-crash re-
bound are common. At the time of writing, for example, the front
cover of "The Economist" sports the headline "Bubble Warning"
and the subtitle "Why assets are overvalued." So here we exam-
ine what “persistence” and “overshooting” can tell us about the
valuation debate and the case for (global) equities going forward.
A macro slant on valuation
In theory, the correct price of any asset is simply “the present
value of all expected future cash flows from that asset.” The
hard part is to figure out what the expected cash flows are –
especially since these cash flows may stretch out 30 years or
more – and to apply a suitable discount rate. And this is where
human psychology enters in. Given the size of the overshoots of
earnings and returns, there is a natural human tendency to be
over-pessimistic at market troughs and over-optimistic at market
peaks. And the most vocal pundits seldom admit that certainty
about future cash flows, and even about the right discount rate
to apply, is not a human prerogative.
What we can say in real time is more limited: namely that
after certain episodes of rapid earnings growth and prosperity
“expected future cash flows” can become dangerously un-
bounded, to the point of irrationality (for example, projecting
corporate earnings or dividend growth to exceed nominal GDP
growth more or less indefinitely). Equally, and especially perhaps
when nominal or real bond yields are very low, bubble valuations
Value
in the USA
As recently as 1890, the US and Chinese economies were about the same size, each account-
ing for about 13% of world GDP. Today China’s share is back to its 1890 level, but rising rap-
idly, while the US share is about 20%, but falling slowly. Even so, the broad US equity market
still accounts for around 40% of world equity market capitalization – three times bigger than all
emerging markets plus Hong Kong. Moreover, nearly a quarter of total US profits and about
30% of S&P 500 sales are generated abroad. So the US market is still far and away the biggest
equity market in the world and strongly linked to emerging growth. It is unlikely that the emerging
world can prosper if the USA fails, and vice versa.
Jonathon Wilmot, Chief Global Strategist, Credit Suisse Investment Banking
CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010_22









might be the result of applying an implausibly low discount rate to
quite sensible expectations of future cash flows. Exactly opposite
conclusions apply after major negative shocks or when real bond
yields are unusually high. To us, however, the long-term data can
be used to help lean against this natural human tendency to feel
what the crowd feels and to mistake cyclical overshoots for
changes in the secular trend. The first line of defense is to make
the simplifying, though simplistic, assumption that the long-run
trend in US real equity returns is indeed about 6% per annum, as
shown in Figure 3. The extreme overshoots are identified in the
charts and tables.
Persistence and overshooting
While this “persistence” is puzzling to many fundamental analysts,
we used it in 1999/2000, at the peak of the tech bubble, to
suggest that the US market looked even more overvalued than in
1929. This was of course not a popular message at the time. In
the event, US real equity returns between March 2000 and March
2009 were lower than in any previous 9-year period, producing
negative returns even greater than the period from October 1929
to October 1938 (US equities also managed to clock up a dismal
record for the worst decade ever).
Assuming “persistence,” what can be said now? First, that
the market appeared very but not outrageously “cheap” in Febru-
ary/March last year, when the authorities managed to restore
funding liquidity to the financial system and prevent a complete
breakdown of the global banking and credit system. Second, that
even after rebounding some 70%, real returns are still slightly
below trend: there is no sign from this metric that equities are in a
bubble. And third, that the historical pattern shows quite clearly
how little time the market spends in the vicinity of its long-term
trend. This is also true for many other more recognized valuation
measures, suggesting that it is seldom useful to base one’s in-
vestment strategy on valuation arguments, unless and until they
are at genuine extremes.
Another possible line of defense for investors is to triangulate
across different valuation measures. For example, it is interesting
to compare our real returns series with Tobin’s Q. Colloquially, this
can be thought of dividing how much it would cost to “buy” the
existing private sector capital stock through the equity market by
its estimated replacement cost. As with many other valuation
measures there are some tricky measurement issues, but Figure 4
compares the most widely cited version of Tobin’s Q for the US
market with the log deviation of real equity returns from trend. The
two measures move roughly in tandem, but with a tendency for
Tobin Q to trend up relative to the deviation of returns measure.
A possible explanation for this is that the common measures
of Tobin’s Q will underestimate replacement cost when there is a
significant element of “intangible capital” built into the share price.
For individual firms, this can mean knowledge, goodwill, unex-
ploited patents or technology, and so on. For the market as a
whole, it could be extended to include the possibility of positive
network effects or externalities from evolving technologies or
innovation. Either way, measured Tobin’s Q is more likely to ex-
ceed 1 in a knowledge-based economy in which intangible capital
is increasingly important, but hard for accountants to measure
accurately. That description seems to fit the evolution of the US
economy rather well, and might lead one to expect a (steady)
Figure 2
US real earnings per share (log levels)
Source: Credit Suisse
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Figure 1
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Source: Credit Suisse
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CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010_23
upward drift in its average value. But even if that were not true,
estimated Tobin’s Q is currently around 1, and nowhere near the
bubble extremes of 1999/2000.
Technology and future earnings growth
Thinking about Tobin’s Q highlights the potential role of intangi-
ble assets and technological progress in driving future earnings
growth. Intuitively, one might expect any persistent trend in real
earnings and dividend growth to be linked to trend growth in
GDP per capita. At first sight, this does not appear to be true.
But, as Figures 1 and 2 show, both earnings growth and pro-
ductivity seem to have trended up at about 2% p.a. for the past
100 years or more, if one allows for a “one-off” level shift in real
earnings after World War I.
Dividends have grown a little more slowly than earnings per
share, but that may largely reflect the growing importance of
technology companies on the one hand and efforts to return
cash to shareholders in a more tax efficient way on the other.
But the more fundamental point is that the persistence of pro-
ductivity and earnings growth over a very long period suggests
one should not lightly dismiss the idea that it will continue. Only
if it does not can we clearly say that equities are overvalued.
So “rational pessimists” might argue that the equity markets
are now overvalued because the ageing population, or global
warming, or the inherent instability of the current capitalist sys-
tem, or the fragility of globalization, or a looming scarcity of
essential resources make it almost certain, in their view, that
future output and productivity growth will in practice be (much)
lower than long-term historical trends would suggest.
Alternatively, one could question the market’s implied dis-
count rate. For example, one could worry that the very same
factors cited above imply that we need a higher-than-usual risk
premium, or that current policies mean that the risk-free rate is
unsustainably low. Or even that the “risk-free” rate can no longer
be regarded as risk free, because the probability of major sover-
eign defaults has gone up enormously after this crisis.


Figure 3
US real equity returns
Source: Credit Suisse
0
4
6
8
10
12
1849 1869 1889 1909 1929 1949 1969 1989
US long-term real equity returns (log level index - returns per annum)
Trend = 6.2%
Standard Deviation = 33.9%
Secular Bull
11.1%
24 yrs
Aftermath
2.9%
12 yrs
Reflation
9.5%
13 yrs
Inflation
- 2.5%
14 yrs
Bubble
22.4%
9 yrs
Deflation
-1.3%
14 yrs
Secular Bull
8.3%
27 yrs
Stagflation
2.8%
14 yrs
Secular Bull
13.6%
16 yrs
-
Panic
7.3%
8 yrs
After -
math
14
0
4
6
8
10
12
1849 1869 1889 1909 1929 1949 1969 1989
US long-term real equity returns (log level index - returns per annum)
Trend = 6.2%
Standard Deviation = 33.9%
Secular Bull
11.1%
24 yrs
Aftermath
2.9%
12 yrs
Reflation
9.5%
13 yrs
Inflation
- 2.5%
14 yrs
Bubble
22.4%
9 yrs
Deflation
-1.3%
14 yrs
Secular Bull
8.3%
27 yrs
Stagflation
2.8%
14 yrs
Secular Bull
13.6%
16 yrs
-
Panic
7.3%
8 yrs
Panic
7.3%
8 yrs
After -
math
14

Figure 4
USA: Tobin’s Q vs. real equity returns deviation
from trend
Source: Credit Suisse
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CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010_24




Table 1
Secular undershoots
Source: Credit Suisse
Year Trough in real equity returns
(no. of years behind trend)
Multiple of trend
earnings at trough
1857 13.1 Ũ
1932 19.1 5.9
1938 10.1 11.0
1942 13.8 6.8
1974 9.7 10.2
1982 11.9 7.3
2009 8.5 13.1



Table 2
Secular overshoots
Source: Credit Suisse
Year Trough in real equity returns
(no.of years ahead trend)
Multiple of trend
earnings at peak
1881 8.5 19.6
1906 8.5 20.4
1929 9.8 30.8
1968 9.2 25.2
1998 10.8 34.3
2000 13.4 39.5
2007 4.8 29.2


Optimism and pessimism
All of these points are arguable – indeed several books could be
written on each one of them. But here we confine ourselves to
three observations. First, optimism and pessimism are highly
social and contagious phenomena: even highly intelligent and
experienced investors tend to become excessively optimistic
after a good run of growth, wealth creation and prosperity, and
excessively pessimistic after a crash. Moreover, as Jeremy
Siegel has noted: "A history of the market suggests that there is
far more “irrational despondency” at market bottoms than “irra-
tional exuberance” at market peaks."
1

Second, much of the current obsession with bubbles is pol-
icy related, and directly relates to the fear that ultra-low interest
rates will foster another bubble if left in place too long. But most
developed-world yield curves are steep, and longer-dated for-
ward yields (both nominal and real) are both considerably higher
than rates are today and in line with longer-term growth rates of
the economy (the UK index-linked market is a notable exception
here). For the most part, therefore, investors are unlikely to be
using an inappropriately low risk-free rate in their present value
calculations.
Third, we know from the simpler versions of the dividend
discount model that the value of an individual equity or of a stock
market goes up exponentially as the discount rate and expected
future growth rate of cash flows start to converge. This is much
more likely to be true in emerging Asia, where structurally high
growth rates are combined with structurally low interest rates. If
anything, emerging equities are probably more bubble prone
than developed markets right now.
US market trading at a plausible multiple
By contrast, a simple regression relating real government or
corporate bond yields to the “trend P/E” ratio shown in our last
chart indicates that the US market is trading at a plausible multi-
ple at the moment. Moreover, the current multiple is within the
middle range – albeit at the top end – of historical experience.
Once again, historic periods of overvaluation or undervalua-
tion are clearly visible. Periods of extreme cheapness (1932,
1942 and 1982) are defined by trend multiples of six to seven
times. Other major troughs (1938, 1974 and 2009?) are de-
fined by multiples in the 10–13 range. Extreme overvaluation is
defined by multiples of 30–40 times trend earnings (1929, 2000
and arguably 2007).
Figure 6 also suggests that there have been “eras” of posi-
tive or negative sentiment towards equities: the 1940s and
1950s stand out as an era of low multiples, and so do the
1970s. The 1960s are a period of optimism and, even more
obviously, so is the period from the mid-1990s to just before the
failure of Lehman Brothers. Perhaps it is no coincidence that
1995 was precisely the moment when the technology sector
exploded into life and productivity growth started to re-
accelerate.
In summary, we would draw five conclusions from the pat-
terns reviewed here. First, the long-term trend in US real earn-


1
Jeremy J. Siegel “What is an Asset Price Bubble? An Operational Defini-
tion,” European Financial Management, 2003
Figure 5
US real equity returns deviations from trend
Source: Credit Suisse
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US rou| oqu|¦y ro¦urns - do»|u¦|on írom ¦rond |n s.d.

CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010_25
ings growth has been remarkably close to the long-term trend in
productivity growth, once you allow for a one-off level shift in real
earnings just after World War I.
Taxation and a change in industry mix may partly account for
the fact the dividend payout ratio has trended down since 1940
or so, but, looking forward, it is more likely that real dividends and
earnings will grow in line. Hence, past and expected future pro-
ductivity growth may indeed help narrow the range of plausible
estimates for “trend” earnings and dividend growth – and by
extension for cyclically adjusted or “trend” P/E. The real question
is whether the current extreme shock to earnings will cause an-
other “permanent” downshift in the level of trend earnings.
Second, if you believe that America will likely renew itself
yet again and deliver trend productivity growth of 2% p.a. in the
future then US equities are arguably closer to “fair value” than
normal, and nowhere near bubble territory. Equally, if you do not
believe in “persistence,” they are indeed overvalued, but not quite
in the sense that most analysts mean. Fundamentally, this is
more of a macro question than a micro one, in our view.
Third, if bad policy or sheer bad luck soon leads to a severe
relapse into debt deflation Ũ followed perhaps by protectionism
and capital controls – it is quite plausible to believe that the equity
risk premium will get stuck in an abnormally high range for many
years. Or, to put it differently, trend multiples could get stuck in
an abnormally “pessimistic” range of 7Ũ13 times, even if past
productivity trends did in fact persist. In round numbers, this
translates to 400Ũ800 for the S&P 500 over the next few years.
Perversely, this might actually mean that the US market was
genuinely cheap for those few longer-term investors who had the
courage and spare cash to increase equity weightings!
Fourth, given the size of the American market, its impor-
tance to emerging country exports and the risk of protectionism
in a bad scenario, investing in emerging equities would likely
provide no hedge against a steep drop in US consumption, GDP
and equity returns. Indeed, rather the opposite, as we saw in
2008/09. Meaningful decoupling from disaster might just work in
20 years time, but not today when emerging world consumption
is still only 20% of the global total.
Fifth, for the rise of China, India and the other big emerging
countries to be sustainable it cannot in the end be a zero sum
game. Indeed, for both political and economic reasons it is almost
certainly impossible for a set of countries this big to become
prosperous mostly by taking export market share from other
(richer) countries. Their growth may, like the USA in the 19th
century, be punctuated by some big upheavals, but the only
sustainable way for them to grow will be via domestic demand
that ultimately expands the global market for US and other devel-
oped country exports. Once again, this leads us to a complex
macro judgment, not a microeconomic debate about valuation.
The next decade for US equities
The overriding common interest of China, India, Russia and the
developed world is to find technological and political solutions to
the challenges of energy security, climate change and the rebal-
ancing of global demand. But free trade and free capital flows
did not in fact survive the replacement of the UK by the USA as
the world’s leading economic power, and this directly contributed
to the Great Depression and huge undershoot in global equity
returns of the 1930s. History warns that this could happen
again, despite a strong common interest in “mutually assured
prosperity.” However, this is just another way of saying that it is
macro factors rather than micro ones that are most germane to
the valuation debate.
When people assert that the market is overvalued, they are
really expressing their skepticism about the future of US produc-
tivity growth and/or the future of globalization. Logically enough,
the reverse is also true: if you believe in the potential benefits of
accelerating technological change and the dramatic rise of the
emerging world, then the next decade for US equities is likely to
be a bright one.
Figure 6
US equity market P/E based on trend earnings
Source: Credit Suisse
0
5
10
15
20
25
30
35
40
Jan 1871 Jan 1886 Jan-1901 Jan-1916 Jan-1931 Jan-1946 Jan-1961 Jan-1976 Jan-1991 Jan-2006
20.2
High
Current = 20.0
7.1
Low
13.1
Medium
Current trend earnings:
USD 59 (nominal)
USD 52 (real)
0
5
10
15
20
25
30
35
40
Jan 1871 Jan 1886 Jan-1901 Jan-1916 Jan-1931 Jan-1946 Jan-1961 Jan-1976 Jan-1991 Jan-2006
20.2
High
Current = 20.0
7.1
Low
13.1
Medium
Current trend earnings:
USD 59 (nominal)
USD 52 (real)

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CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010_26
CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 Country profiles_27

Guide to the country profiles
Individual
markets
The Credit Suisse Global Investment Returns Yearbook
has been expanded to cover 22 countries and regions,
all with index series that start in 1900. Two countries
appear for the first time in the 2010 Yearbook: Finland
and New Zealand. Figure 1 shows the relative sizes of
world equity markets at our base date of end-1899.
Figure 2 shows how they had changed by end-2009.
Markets that are not included in the Yearbook dataset
are colored in black. As these pie charts show, the
Yearbook covered 89% of the world equity market in
1900 and 85% by end-2009.
In the country pages that follow, there are three charts
for each country or region. The upper chart reports, for
the last 110 years, the real value of an initial investment
in equities, long-term government bonds, and Treasury
bills, all with income reinvested. The middle chart
reports the annualized premium achieved by equities
relative to bonds and to bills, measured over the last
decade, quarter-century, half-century, and full 110
years. The bottom chart compares the 110-year
annualized real returns, nominal returns, and standard
deviation of real returns for equities, bonds, and bills.
The country pages provide data for 19 countries, listed
alphabetically starting on the next page, and followed by
three broad regional groupings. The latter are a 19-
country world equity index denominated in USD, an
analogous 18-country world ex-US equity index, and an
analogous 13-country European equity index. All equity
indexes are weighted by market capitalization (or, in
years before capitalizations were available, by GDP). We
also compute bond indexes for the world, world ex-US
and Europe, with countries weighted by GDP.
Extensive additional information is available in the Credit
Suisse Global Investment Returns Sourcebook 2010.
This 200-page reference book is available through
London Business School (see the inside back cover for
contact details).The underlying data are available
through Morningstar Inc.


The Yearbook’s global coverage
The Yearbook contains annual returns on stocks, bonds, bills, inflation,
and currencies for 19 countries from 1900 to 2009. The countries
comprise two North American nations (Canada and the USA), eight
euro-currency area states (Belgium, Finland, France, Germany, Ireland,
Italy, the Netherlands, and Spain), five European markets that are
outside the euro area (Denmark, Norway, Sweden, Switzerland, and the
UK), three Asia-Pacific countries (Australia, Japan, and New Zealand),
and one African market (South Africa). These countries covered 89% of
global stock market capitalization in 1900 and 85% by the start of
2010.
Figure 1
Relative sizes of world stock markets, end-1899

UK 30.5%
USA 19.3%
France 14.3%
Other 3.6%
Other Yearbook 5.1%
Italy 1.6%
Canada 1.8%
Belgium 3.8%
Austria-Hungary 3.5%
Russia 3.9%
Japan 4.0%
Germany 6.9%
Netherlands 1.6%
UK 30.5%
USA 19.3%
France 14.3%
Other 3.6%
Other Yearbook 5.1%
Italy 1.6%
Canada 1.8%
Belgium 3.8%
Austria-Hungary 3.5%
Russia 3.9%
Japan 4.0%
Germany 6.9%
Netherlands 1.6%
Figure 2
Relative sizes of world stock markets, end-2009

UK 8.7%
Japan 7.9%
Other 15.4%
Italy 1.6%
France 4.7%
Canada 3.6%
Australia 3.5%
Switzerland 3.1%
Germany 3.3%
Spain 2.1%
Other Yearbook 5.2%
USA 41.0%
UK 8.7%
Japan 7.9%
Other 15.4%
Italy 1.6%
France 4.7%
Canada 3.6%
Australia 3.5%
Switzerland 3.1%
Germany 3.3%
Spain 2.1%
Other Yearbook 5.2%
USA 41.0%

Source: Elroy Dimson, Paul Marsh and Mike Staunton, Credit Suisse Global Investment
Returns Sourcebook 2010

Bibliography and data sources
1. Dimson, E., P. R. Marsh and M. Staunton, 2002, Triumph of the
Optimists, NJ: Princeton University Press
2. Dimson, E., P. R. Marsh and M. Staunton, 2008, The worldwide equity
premium: a smaller puzzle, R Mehra (Ed.) The Handbook of the Equity
Risk Premium, Amsterdam: Elsevier
3. Dimson, E., P. R. Marsh and M. Staunton, 2010, Credit Suisse Global
Investment Returns Sourcebook
4. Dimson, E., P. R. Marsh and M. Staunton, 2010, The Dimson-Marsh-
Staunton Global Investment Returns Database, Morningstar Inc. (the
“DMS” data module)



CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 Country profiles_28


Australia
The lucky
country
Australia is often described as “the Lucky Country” with
reference to its natural resources, prosperity, weather,
and distance from problems elsewhere in the world.
This luck has extended to equity investors. Australia has
been the best performing equity market over the 110
years since1900, with a real return of 7.5% per year.
More than 50% of Australia’s adult population own
shares in publicly listed companies.
The Australian Securities Exchange (ASX) has its origins
in six separate exchanges, established as early as 1861
in Melbourne and 1871 in Sydney, well before the
federation of the Australian colonies to form the
Commonwealth of Australia in 1901. The ASX is now
the world’s eighth-largest stock exchange. Its principal
sectors are banks (28%) and mining (20%), while the
largest stocks are BHP Billiton, Westpac and
Commonwealth Bank of Australia.
Australia also has a significant government and
corporate bond market, and is home to the largest
financial futures and options exchange in the Asia-
Pacific region. It has the world’s seventh-largest forex
market and the Australian dollar is the world’s sixth most
heavily traded currency. Sydney is a major global
financial center.



Capital market returns for Australia
Figure 1 shows that, over the last 110 years, the real value of equities,
with income reinvested, grew by a factor of 2844.1 as compared to 4.7
for bonds and 2.1 for bills. Figure 2 shows that, since 1900, equities
beat bonds by 6.0% and bills by 6.8% per year. Figure 3 shows that
the long-term real return on Australian equities was an annualized 7.5%
as compared to bonds and bills, which gave a real return of 1.4% and
0.7% respectively. For additional explanations of these figures, see
page 27.
Figure 1
Annualized performance from 1900 to 2009
2,844
4.7
2.1
0
1
10
100
1,000
10,000
1900 10 20 30 40 50 60 70 80 90 2000 10
Equities Bonds Bills
Figure 2
Equity risk premium over 10 to 110 years
3.4
6.8
6.0
3.5
1.9 1.9
3.2
4.1
-10
-5
0
5
10
2000-2009 1985-2009 1960-2009 1900-2009
Premium vs Bonds (% p.a.) Premium vs Bills (% p.a.)
Figure 3
Returns and risk of major asset classes since 1900
18.2
11.7
7.5
13.3
5.3 1.4 5.4
4.6 0.7
-5
0
5
10
15
20
25
Real return (%) Nominal return (%) Standard deviation
Equities Bonds Bills

Source: Elroy Dimson, Paul Marsh and Mike Staunton, Credit Suisse Global Investment
Returns Sourcebook 2010

CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 Country profiles_29


Belgium
At the heart
of Europe
Lithuania claims to lie at the geographical heart of
Europe, but Belgium can also assert centrality. It lies at
the crossroads of Europe’s economic backbone and its
key transport and trade corridors, and is the
headquarters of the European Union. In 2010, Belgium
was ranked the most globalized of the 181 countries
that are evaluated by the KOF Index of Globalization.
Belgium’s strategic location has been a mixed
blessing, making it a major battleground in two world
wars. The ravages of war and attendant high inflation
rates are an important contributory factor to its poor
long-run investment returns – Belgium has been one of
the two worst-performing equity markets and the sixth
worst performing bond market.
The Brussels stock exchange was established in 1801
under French Napoleonic rule. Brussels rapidly grew
into a major financial center, specializing during the
early 20th century in tramways and urban transport.
Its importance has gradually declined, and Euronext
Brussels now ranks 26th among world exchanges by
size. It suffered badly during the recent banking crisis.
Three large banks made up over half its market
capitalization at start-2008, but they now comprise
around one-tenth of the index. The three largest
stocks at end-2009 were Anheuser-Busch, Fortis, and
KBC.




Capital market returns for Belgium
Figure 1 shows that, over the last 110 years, the real value of equities,
with income reinvested, grew by a factor of 15.6 compared to 0.9 for
bonds and 0.7 for bills. Figure 2 shows that, since 1900, equities beat
bonds by 2.6% and bills by 2.9% per year. Figure 3 shows that the
long-term real return on Belgium equities was an annualized 2.5%
compared to bonds and bills, which gave a real return of –0.1% and
–0.3%, respectively. For additional explanations of these figures, see
page 27.
Figure 1
Annualized performance from 1900 to 2009
16
0.9
0.7
0
1
10
100
1900 10 20 30 40 50 60 70 80 90 2000 10
Equities Bonds Bills
Figure 2
Equity risk premium over 10 to 110 years
-5.7
2.9 2.6
1.0
0.6
-2.9
3.8
1.6
-10
-5
0
5
10
2000-2009 1985-2009 1960-2009 1900-2009
Premium vs Bonds (% p.a.) Premium vs Bills (% p.a.)
Figure 3
Returns and risk of major asset classes since 1900
23.7
8.0
2.5
12.0
5.2
-0.1
8.1
5.0
-0.3
-5
0
5
10
15
20
25
Real return (%) Nominal return (%) Standard deviation
Equities Bonds Bills

Source: Elroy Dimson, Paul Marsh and Mike Staunton, Credit Suisse Global Investment
Returns Sourcebook 2010

CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 Country profiles_30


Canada
Resourceful
country
Canada is the world’s second-largest country by land
mass (after Russia), and its economy is the tenth-largest.
It is blessed with natural resources, having the world’s
second-largest oil reserves, while its mines are leading
producers of nickel, gold, diamonds, uranium and lead. It
is also a major exporter of soft commodities, especially
grains and wheat, as well as lumber, pulp and paper.
The Canadian equity market dates back to the opening of
the Toronto Stock Exchange in 1861 and is the world’s
fifth-largest, accounting for 3.6% of world capitalization.
Given Canada’s natural endowment, it is no surprise that
oil and gas and mining stocks have a 35% weighting in its
equity market, while a further 26% is accounted for by
financials. The largest stocks are currently Royal Bank of
Canada, Toronto-Dominion Bank and Suncor Energy.
Canadian equities have performed well over the long run,
with a real return of 5.8% per year. The real return on
bonds has been 2.0% per year. These figures are
remarkably close to those for the United States.



Capital market returns for Canada
Figure 1 shows that, over the last 110 years, the real value of equities,
with income reinvested, grew by a factor of 479.5 compared to 9.1 for
bonds and 5.8 for bills. Figure 2 shows that, since 1900, equities beat
bonds by 3.7% and bills by 4.1% per year. Figure 3 shows that the
long-term real return on Canadian equities was an annualized 5.8%
compared to bonds and bills, which gave a real return of 2.0% and
1.6%, respectively. For additional explanations of these figures, see
page 27.
Figure 1
Annualized performance from 1900 to 2009
479
9.1
5.8
0
1
10
100
1,000
1900 10 20 30 40 50 60 70 80 90 2000 10
Equities Bonds Bills
Figure 2
Equity risk premium over 10 to 110 years
-2.0
2.8
4.1
3.7
1.5
-0.9
2.4
3.2
-10
-5
0
5
10
2000-2009 1985-2009 1960-2009 1900-2009
Premium vs Bonds (% p.a.) Premium vs Bills (% p.a.)
Figure 3
Returns and risk of major asset classes since 1900
17.3
9.0
5.8
10.4
5.1
2.0
4.9 4.7 1.6
-5
0
5
10
15
20
25
Real return (%) Nominal return (%) Standard deviation
Equities Bonds Bills

Source: Elroy Dimson, Paul Marsh and Mike Staunton, Credit Suisse Global Investment
Returns Sourcebook 2010

CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 Country profiles_31


Denmark
Happiest
nation
In a recent global survey of citizens’ happiness,
Denmark was ranked “happiest place on earth,” closely
followed by Switzerland and Austria, with Zimbabwe,
understandably, ranked “least happy.”
Whatever the source of Danish happiness, it does not
appear to spring from outstanding equity returns. Since
1900, Danish equities have given an annualized real
return of 4.9%, which, while respectable, is below the
world return of 5.4%.
In contrast, Danish bonds gave an annualized real return
of 3.0%, the highest among the Yearbook countries.
This is because our Danish bond returns, unlike those
for the other 18 countries, include an element of credit
risk. The returns are taken from a study by Claus
Parum, who felt it was more appropriate to use
mortgage bonds, rather than more thinly traded
government bonds. The country with the highest returns
for truly default-free bonds is Sweden.
The Copenhagen Stock Exchange was formally
established in 1808, but can trace its roots back to the
late 17th century. The Danish equity market is relatively
small, ranking as the world’s 25th largest. It has a high
weighting in healthcare (42%) and industrials (19%),
and the largest stocks listed in Copenhagen are Novo-
Nordisk, Danske Banking, and Vestas Wind Systems.



Capital market returns for Denmark
Figure 1 shows that, over the last 110 years, the real value of equities,
with income reinvested, grew by a factor of 191.9 compared to 25.6 for
bonds and 12.0 for bills. Figure 2 shows that, since 1900, equities beat
bonds by 1.8% and bills by 2.5% per year. Figure 3 shows that the
long-term real return on Danish equities was an annualized 4.9%
compared to bonds and bills, which gave a real return of 3.0% and
2.3%, respectively. For additional explanations of these figures, see
page 27.
Figure 1
Annualized performance from 1900 to 2009
192
25.6
12.0
0
1
10
100
1,000
1900 10 20 30 40 50 60 70 80 90 2000 10
Equities Bonds Bills
Figure 2
Equity risk premium over 10 to 110 years
2.8 2.5
1.8
0.9
-0.1 -0.1
2.2
3.2
-10
-5
0
5
10
2000-2009 1985-2009 1960-2009 1900-2009
Premium vs Bonds (% p.a.) Premium vs Bills (% p.a.)
Figure 3
Returns and risk of major asset classes since 1900
20.8
9.0
4.9
11.7
7.0
3.0
6.1 6.3
2.3
-5
0
5
10
15
20
25
Real return (%) Nominal return (%) Standard deviation
Equities Bonds Bills

Source: Elroy Dimson, Paul Marsh and Mike Staunton, Credit Suisse Global Investment
Returns Sourcebook 2010

CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 Country profiles_32


Finland
East meets
West
With its proximity to the Baltic and Russia, Finland is a
meeting place for Eastern and Western European
cultures. This country of snow, swamps and forests –
one of Europe’s most sparsely populated nations – was
part of the Kingdom of Sweden until sovereignty
transferred in 1809 to the Russian Empire. In 1917,
Finland became an independent country.
The Finns have transformed their country from a farm
and forest-based community to a diversified industrial
economy operating on free-market principles. The
OECD ranks Finnish schooling as the best in the world.
Per capita income is among the highest in Western
Europe. A member of the EU since 1995, Finland is the
only Nordic state in the euro currency area.
Finland excels in high-tech exports. It is home to Nokia,
the world’s largest manufacturer of mobile telephones,
which is rated the most valuable global brand outside
the USA. Forestry, an important export earner, provides
a secondary occupation for the rural population.
Finnish securities were initially traded over-the-counter
or overseas, and trading began at the Helsinki Stock
Exchange in 1912. Since 2003, the Helsinki exchange
has been part of the OMX family of Nordic markets. At
its peak, Nokia represented 72% of the value-weighted
HEX All Shares Index, and Finland is a highly
concentrated market. The largest Finnish companies are
currently Nokia, Sampo, and Fortum. Nokia’s value fell
during 2009 by 20%, which damaged Finland’s stock-
market performance.



Capital market returns for Finland
Figure 1 shows that, over the last 110 years, the real value of equities,
with income reinvested, grew by a factor of 250.6 as compared to 0.7
for bonds and 0.6 for bills. Figure 2 shows that, since 1900, equities
beat bonds by 5.4% and bills by 5.6% per year. Figure 3 shows that
the long-term real return on Finnish equities was an annualized 5.1% as
compared to bonds and bills, which gave a real return of –0.3% and
–0.4% respectively. For additional explanations of these figures, see
page 27.
Figure 1
Annualized performance from 1900 to 2009
251
0.7
0.6
0
1
10
100
1,000
1900 10 20 30 40 50 60 70 80 90 2000 10
Equities Bonds Bills
Figure 2
Equity risk premium over 10 to 110 years
-10.2
4.6
5.6 5.4
4.1
3.7
-7.6
5.5
-10
-5
0
5
10
2000-2009 1985-2009 1960-2009 1900-2009
Premium vs Bonds (% p.a.) Premium vs Bills (% p.a.)
Figure 3
Returns and risk of major asset classes since 1900
30.4
12.9
5.1
13.8
7.1
-0.3
11.9
6.9
-0.4
-5
0
5
10
15
20
25
Real return (%) Nominal return (%) Standard deviation
Equities Bonds Bills

Source: Elroy Dimson, Paul Marsh and Mike Staunton, Credit Suisse Global Investment
Returns Sourcebook 2010

CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 Country profiles_33


France
European
center
Paris and London competed vigorously as financial
centers in the 19th century. After the Franco-Prussian
War in 1870, London achieved domination. But Paris
remained important, especially, to its later disadvantage,
in loans to Russia and the Mediterranean region,
including the Ottoman Empire. As Kindelberger, the
economic historian put it, “London was a world financial
center; Paris was a European financial center.”
Paris has continued to be an important financial center
while France has remained at the center of Europe,
being a founder member of the European Union and the
euro. France is Europe’s second-largest economy and
the fifth-largest in the world. It has Europe’s second
largest equity market, ranked fourth in the world. It has
the fourth-largest domestic bond market in the world.
Long-run French asset returns have been disappointing.
France ranks 16th out of the 19 Yearbook countries for
equity performance, 15th for bonds and 18th for bills. It
has had the third-highest inflation, hence the poor fixed
income returns. However, the inflationary episodes and
poor performance date back to the first half of the 20th
century and are linked to the world wars. Since 1950,
French equities have achieved mid-ranking returns.



Capital market returns for France
Figure 1 shows that, over the last 110 years, the real value of equities,
with income reinvested, grew by a factor of 27.8 compared to 0.8 for
bonds and 0.04 for bills. Figure 2 shows that, since 1900, equities beat
bonds by 3.3% and bills by 6.1% per year. Figure 3 shows that the
long-term real return on French equities was an annualized 3.1%
compared to bonds and bills, which gave a real return of –0.2% and
–2.8%, respectively. For additional explanations of these figures, see
page 27.
Figure 1
Annualized performance from 1900 to 2009
28
0.8
0.04
0.01
0.1
1
10
100
1900 10 20 30 40 50 60 70 80 90 2000 10
Equities Bonds Bills
28
0.8
0.04
0.01
0.1
1
10
100
1900 10 20 30 40 50 60 70 80 90 2000 10
Equities Bonds Bills
Figure 2
Equity risk premium over 10 to 110 years
-6.5
3.6
6.1
3.3
-0.9
1.1
-3.2
5.2
-10
-5
0
5
10
2000-2009 1985-2009 1960-2009 1900-2009
Premium vs Bonds (% p.a.) Premium vs Bills (% p.a.)
Figure 3
Returns and risk of major asset classes since 1900
23.6
10.6
3.1
13.1
7.0
-0.2
9.6
4.2
-2.8
-5
0
5
10
15
20
25
Real return (%) Nominal return (%) Standard deviation
Equities Bonds Bills

Source: Elroy Dimson, Paul Marsh and Mike Staunton, Credit Suisse Global Investment
Returns Sourcebook 2010

CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 Country profiles_34


Germany
Locomotive
of Europe
German capital market history changed radically after
World War II. In the first half of the 20th century,
German equities lost two-thirds of their value in World
War I. In the hyperinflation of 1922–23, inflation hit 209
billion percent, and holders of fixed income securities
were wiped out. In World War II and its immediate
aftermath, equities fell by 88% in real terms, while
bonds fell by 91%.
There was then a remarkable transformation. In the early
stages of its “economic miracle,” German equities rose
by 4,094% in real terms from 1949 to 1959. Germany
rapidly became known as the “locomotive of Europe.”
Meanwhile, it built a reputation for fiscal and monetary
prudence. From 1949 to date, it has enjoyed the world’s
lowest inflation rate, its strongest currency (now the
euro), and the second best-performing bond market.
Germany is Europe’s largest economy. It lost its position
as the world’s top exporter to China, and is now ranked
second biggest exporter in the world. Its stock market,
which dates back to 1685, ranks seventh in the world by
size, while it has the fifth-largest domestic bond market
in the world.
The German stock market retains its bias towards
manufacturing, with weightings of 15% in consumer
goods, 17% in industrials, 18% in basic materials, and
14% in utilities (15.7%). The largest stocks are
Siemens and E.ON.



Capital market returns for Germany
Figure 1 shows that, over the last 110 years, the real value of equities,
with income reinvested, grew by a factor of 25.2 as compared to 0.11
for bonds and 0.07 for bills. Figure 2 shows that, since 1900, equities
beat bonds by 5.4% and bills by 5.8% per year. Figure 3 shows that
the long-term real return on German equities was an annualized 3.0%
as compared to bonds and bills, which gave a real return of –2.0% and
–2.4%, respectively. 1922–23 is included only for real equity return.
For additional explanations of these figures, see page 27.
Figure 1
Annualized performance from 1900 to 2009
Figure 2
Equity risk premium over 10 to 110 years
-6.9
2.5
5.8
5.4
0.4
1.0
-4.0
3.2
-10
-5
0
5
10
2000-2009 1985-2009 1960-2009 1900-2009
Premium vs Bonds (% p.a.) Premium vs Bills (% p.a.)
Figure 3
Returns and risk of major asset classes since 1900
32.4
8.3
3.0
15.6
2.7
-2.0
13.3
2.3
-2.4
-5
0
5
10
15
20
25
Real return (%) Nominal return (%) Standard deviation
Equities Bonds Bills

Source: Elroy Dimson, Paul Marsh and Mike Staunton, Credit Suisse Global Investment
Returns Sourcebook 2010

25
0.11
0.07
0
0
1
10
100
1900 10 20 30 40 50 60 70 80 90 2000 10
Equities Bonds Bills
0.01
0.1
CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 Country profiles_35


Ireland
Celtic
Tiger
Ireland gained its independence from the United
Kingdom in 1922. However, stock exchanges had
existed in Dublin and Cork since 1793, so in order to
monitor Irish stocks from 1900 (22 years before
independence), we constructed an index for Ireland
based on stocks traded on these two exchanges.
In the period following independence, neither economic
growth, nor equity returns were especially strong. During
the 1950s, Ireland experienced large-scale emigration.
It joined the European Union in 1973, and from 1987
the economy improved.
The 1990s saw the beginning of unprecedented
economic success, and Ireland became known as the
Celtic Tiger. By 2007, it had become the world’s fifth-
richest country in terms of GDP per capita, the second-
richest in the EU, and was experiencing net immigration.
Over the period 1987–2006, Ireland had the second-
highest real equity return of any Yearbook country.
Ireland is one of the smallest markets covered by the
Yearbook, and sadly, it has shrunk since 2006. Too
much of the market boom was based on real estate,
financials and gearing, and Irish stocks fell 75% in real
terms in 2007–08. At the end of 2006, the Irish market
had a 57% weighting in financials, but these fell by
95% during 2007–08; by 2010 they represented just
10% of the market. The tiger now has a smaller bite.



Capital market returns for Ireland
Figure 1 shows that, over the last 110 years, the real value of equities,
with income reinvested, grew by a factor of 60.6 compared to 3.5 for
bonds and 2.2 for bills. Figure 2 shows that, since 1900, equities beat
bonds by 2.6% and bills by 3.1% per year. Figure 3 shows that the
long-term real return on Irish equities was an annualized 3.8%
compared to bonds and bills, which gave a real return of 1.1% and
0.7%, respectively. For additional explanations of these figures, see
page 27.
Figure 1
Annualized performance from 1900 to 2009
61
3.5
2.2
0
1
10
100
1,000
1900 10 20 30 40 50 60 70 80 90 2000 10
Equities Bonds Bills
Figure 2
Equity risk premium over 10 to 110 years
-8.2
4.4
3.1
2.6
3.5
0.0
-5.9
3.7
-10
-5
0
5
10
2000-2009 1985-2009 1960-2009 1900-2009
Premium vs Bonds (% p.a.) Premium vs Bills (% p.a.)
Figure 3
Returns and risk of major asset classes since 1900
23.2
8.2
3.8
14.7
5.5
1.1
6.7
5.0
0.7
-5
0
5
10
15
20
25
Real return (%) Nominal return (%) Standard deviation
Equities Bonds Bills

Source: Elroy Dimson, Paul Marsh and Mike Staunton, Credit Suisse Global Investment
Returns Sourcebook 2010

CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 Country profiles_36


Italy
Banking
innovators
While banking can trace its roots back to Biblical times,
Italy can claim a key role in the early development of
modern banking. North Italian bankers, including the
Medici, dominated lending and trade financing
throughout Europe in the Middle Ages. These bankers
were known as Lombards, a name that was then
synonymous with Italians. Indeed, banking takes its
name from the Italian word “banca," the bench on which
the Lombards used to sit to transact their business.
Italy retains a large banking sector to this day, with
financials accounting for 43% of the Italian equity
market. Oil and gas accounts for a further 20%, and the
largest stocks traded on the Milan Stock Exchange are
Eni, Generali Assicurazio and Unicredito.
Sadly, Italy has experienced some of the poorest asset
returns of any Yearbook country. Since 1900, the
annualized real return from equities has been 2.1%, the
lowest return out of 19 countries. Apart from Germany,
with its post-World War I and post-World War II
hyperinflations, Italy has experienced the second-worst
real bond and worst bill returns of any Yearbook country
(see Figure 1 opposite), and the highest inflation rate
and weakest currency.
Today, Italy is the world’s seventh-largest economy. Its
equity market is the world’s 13th largest, while its highly
developed domestic bond market is the world’s third-
largest.



Capital market returns for Italy
Figure 1 shows that, over the last 110 years, the real value of equities,
with income reinvested, grew by a factor of 9.5 compared to 0.2 for
bonds and 0.02 for bills. Figure 2 shows that, since 1900, equities beat
bonds by 3.8% and bills by 5.9% per year. Figure 3 shows that the
long-term real return on Italian equities was an annualized 2.1%
compared to bonds and bills, which gave a real return of –1.6% and
–3.7%, respectively. For additional explanations of these figures, see
page 27.
Figure 1
Annualized performance from 1900 to 2009
Figure 2
Equity risk premium over 10 to 110 years
-7.2
5.9
3.8
-1.5
-1.3
-4.6
3.5
0.9
-10
-5
0
5
10
2000-2009 1985-2009 1960-2009 1900-2009
Premium vs Bonds (% p.a.) Premium vs Bills (% p.a.)
Figure 3
Returns and risk of major asset classes since 1900
29.1
10.8
2.1
14.1
6.7
-1.6
11.6
4.5
-3.7
-5
0
5
10
15
20
25
Real return (%) Nominal return (%) Standard deviation
Equities Bonds Bills

Source: Elroy Dimson, Paul Marsh and Mike Staunton, Credit Suisse Global Investment
Returns Sourcebook 2010

9
0.2
0.02
0
0
1
10
100
1900 10 20 30 40 50 60 70 80 90 2000 10
Equities Bonds Bills
0.01
0.1
CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 Country profiles_37


Japan
Birthplace
of futures
Japan has a long heritage in financial markets. Trading
in rice futures had been initiated around 1730 in Osaka,
which created its stock exchange in 1878. Osaka was to
become the leading derivatives exchange in Japan (and
the world’s largest futures market in 1990 and 1991)
while the Tokyo stock exchange, also founded in 1878,
was to become the leading market for spot trading.
From 1900 to 1939, Japan was the world’s second-
best equity performer. But World War II was disastrous
and Japanese stocks lost 96% of their real value. From
1949 to 1959, Japan’s “economic miracle” began and
equities gave a real return of 1,565%. With one or two
setbacks, equities kept rising for another 30 years.
By the start of the 1990s, the Japanese equity market
was the largest in the world, with a 40% weighting in
the world index versus 32% for the USA. Real estate
values were also riding high and it was alleged that the
grounds of the Imperial palace in Tokyo were worth
more than the entire State of California.
Then the bubble burst. From 1990 to 2009, Japan was
the worst-performing stock market, losing two-thirds of
its value in real terms. Its weighting in the world index
fell from 40% to 8%. Meanwhile, Japan suffered a
prolonged period of stagnation, banking crises and
deflation. Hopefully, this will not form the blueprint for
other countries over the coming decade.
Despite the fallout from the bursting of the asset
bubble, Japan remains a major economic power, with
the world’s second-largest GDP. It has the world’s third-
largest equity market as well as its second-biggest bond
market. It is a world leader in technology, automobiles,
electronics, machinery and robotics, and this is reflected
in the composition of its equity market.



Capital market returns for Japan
Figure 1 shows that, over the last 110 years, the real value of equities,
with income reinvested, grew by a factor of 63.4 as compared to 0.3
for bonds and 0.1 for bills. Figure 2 shows that, since 1900, equities
beat bonds by 5.1% and bills by 5.9% per year. Figure 3 shows that
the long-term real return on Japanese equities was an annualized 3.8%
as compared to bonds and bills, which gave a real return of –1.2%
and –1.9%, respectively. For additional explanations of these figures,
see page 27.
Figure 1
Annualized performance from 1900 to 2009
Figure 2
Equity risk premium over 10 to 110 years
-7.8
3.2
5.9
5.1
-0.8
-5.0
-5.2
-1.4
-10
-5
0
5
10
2000-2009 1985-2009 1960-2009 1900-2009
Premium vs Bonds (% p.a.) Premium vs Bills (% p.a.)
Figure 3
Returns and risk of major asset classes since 1900
29.9
11.2
3.8
20.2
5.8
-1.2
14.0
5.0
-1.9
-5
0
5
10
15
20
25
Real return (%) Nominal return (%) Standard deviation
Equities Bonds Bills

Source: Elroy Dimson, Paul Marsh and Mike Staunton, Credit Suisse Global Investment
Returns Sourcebook 2010


63
0.3
0.1
0
0
1
10
100
1,000
1900 10 20 30 40 50 60 70 80 90 2000 10
Equities Bonds Bills
0.01
0.1
CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 Country profiles_38

Netherlands
Exchange
pioneer
Although some forms of stock trading occurred in
Roman times, organized trading did not take place until
transferable securities appeared in the 17th century.
The Amsterdam market, which started in 1611, was the
world’s main center of stock trading in the 17th and
18th centuries. A book written in 1688 by a Spaniard
living in Amsterdam (appropriately entitled Confusion de
Confusiones) describes the amazingly diverse tactics
used by investors. Even though only one stock was
traded – the Dutch East India Company – they had
bulls, bears, panics, bubbles and other features of
modern exchanges.
The Amsterdam Exchange continues to prosper today as
part of Euronext. It is the world’s 17th largest equity
market and, over the years, Dutch equities have
generated a mid-ranking real return of 4.9% per year.
The Netherlands has traditionally been a low inflation
country and, since 1900, has enjoyed the second-
lowest inflation rate among the Yearbook countries
(after Switzerland).
The Netherlands has a prosperous open economy,
which ranks 16th in the world. For a small country, the
Netherlands hosts more than its share of major
multinationals, including Unilever, Royal Dutch Shell,
Philips, ArcelorMittal, Heineken, TNT, Ahold, Akzo
Nobel, Reed Elsevier and ING Group.



Capital market returns for the Netherlands
Figure 1 shows that, over the last 110 years, the real value of equities,
with income reinvested, grew by a factor of 200.7 compared to 4.4 for
bonds and 2.2 for bills. Figure 2 shows that, since 1900, equities beat
bonds by 3.5% and bills by 4.2% per year. Figure 3 shows that the
long-term real return on Dutch equities was an annualized 4.9%
compared to bonds and bills, which gave a real return of 1.4% and
0.7%, respectively. For additional explanations of these figures, see
page 27.
Figure 1
Annualized performance from 1900 to 2009
201
4.4
2.2
0
1
10
100
1,000
1900 10 20 30 40 50 60 70 80 90 2000 10
Equities Bonds Bills
Figure 2
Equity risk premium over 10 to 110 years
-8.6
4.4
4.2
3.5
3.3
2.5
-5.7
4.7
-10
-5
0
5
10
2000-2009 1985-2009 1960-2009 1900-2009
Premium vs Bonds (% p.a.) Premium vs Bills (% p.a.)
Figure 3
Returns and risk of major asset classes since 1900
21.9
8.0
4.9
9.4
4.3
1.4 5.0
3.7
0.7
-5
0
5
10
15
20
25
Real return (%) Nominal return (%) Standard deviation
Equities Bonds Bills

Source: Elroy Dimson, Paul Marsh and Mike Staunton, Credit Suisse Global Investment
Returns Sourcebook 2010

CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 Country profiles_39


New Zealand
Purity and
integrity
For a decade, New Zealand has been promoting itself
to the world as “100% pure” and Forbes calls this
marketing drive one of the world's top ten travel
campaigns. But the country also prides itself on
honesty, openness, good governance, and freedom to
run businesses. According to Transparency
International, New Zealand is perceived as the least
corrupt country in the world. The Wall Street Journal
ranks New Zealand as the best in the world for
business freedom.
The British colony of New Zealand became an
independent dominion in 1907. Traditionally, New
Zealand's economy was built upon on a few primary
products, notably wool, meat, and dairy products. It
was dependent on concessionary access to British
markets until UK accession to the European Union.
Over the last two decades, New Zealand has evolved
into a more industrialized, free market economy. It
competes globally as an export-led nation through
efficient ports, airline services, and submarine fiber-
optic communications.
The New Zealand Exchange traces its roots to the
Gold Rush of the 1870s. In 1974, the regional stock
markets merged to form the New Zealand Stock
Exchange. In 2003, the Exchange demutualized, and
officially became the New Zealand Exchange Limited.
The largest firms traded on the exchange are Fletcher
Building, and Telecom Corporation of New Zealand.



Capital market returns for New Zealand
Figure 1 shows that, over the last 110 years, the real value of equities,
with income reinvested, grew by a factor of 537.5 as compared to 8.5
for bonds and 6.2 for bills. Figure 2 shows that, since 1900, equities
beat bonds by 3.8% and bills by 4.1% per year. Figure 3 shows that
the long-term real return on New Zealand equities was an annualized
5.9% as compared to bonds and bills, which gave a real return of 2.0%
and 1.7% respectively. For additional explanations of these figures, see
page 27.
Figure 1
Annualized performance from 1900 to 2009
537
8.5
6.2
0
1
10
100
1,000
1900 10 20 30 40 50 60 70 80 90 2000 10
Equities Bonds Bills
Figure 2
Equity risk premium over 10 to 110 years
2.5
4.1
3.8
2.5
-3.9
-0.9
0.1
-2.0
-10
-5
0
5
10
2000-2009 1985-2009 1960-2009 1900-2009
Premium vs Bonds (% p.a.) Premium vs Bills (% p.a.)
Figure 3
Returns and risk of major asset classes since 1900
19.8
9.8
5.9
9.1
5.8
2.0
4.7
5.5
1.7
-5
0
5
10
15
20
25
Real return (%) Nominal return (%) Standard deviation
Equities Bonds Bills

Source: Elroy Dimson, Paul Marsh and Mike Staunton, Credit Suisse Global Investment
Returns Sourcebook 2010

CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 Country profiles_40


Norway
Nordic oil
kingdom
Norway is a very small country (ranked 115th by
population and 61st by land area) surrounded by large
natural resources that make it the world’s fourth-largest
oil exporter and the second-largest exporter of fish.
The population of 4.8 million enjoys the second-largest
GDP per capita in the world and lives under a
constitutional monarchy outside the Eurozone (a
distinction shared with the UK). The United Nations,
through its Human Development Index, ranks Norway
the best country in the world for life expectancy,
education and standard of living.
The Oslo stock exchange (OSE) was founded as
Christiania Bors in 1819 for auctioning ships,
commodities and currencies. Later, this extended to
trading in stocks and shares. The exchange now forms
part of the OMX grouping of Scandinavian exchanges.
In the 1990s, the Government established its petroleum
fund to invest the surplus wealth from oil revenues. This
has grown to become the largest fund in Europe and the
second-largest in the world. The fund invests
predominantly in equities, and its asset value is now
comparable to that of the Oslo stock exchange.
The largest OSE stocks are Statoil, DnB NOR, and
Telenor.



Capital market returns for Norway
Figure 1 shows that, over the last 110 years, the real value of equities,
with income reinvested, grew by a factor of 86.3 compared to 6.2 for
bonds and 3.6 for bills. Figure 2 shows that, since 1900, equities beat
bonds by 2.4% and bills by 2.9% per year. Figure 3 shows that the
long-term real return on Norwegian equities was an annualized 4.1%
compared to bonds and bills, which gave a real return of 1.7% and
1.2%, respectively. For additional explanations of these figures, see
page 27.
Figure 1
Annualized performance from 1900 to 2009
86
6.2
3.6
0
1
10
100
1,000
1900 10 20 30 40 50 60 70 80 90 2000 10
Equities Bonds Bills
Figure 2
Equity risk premium over 10 to 110 years
3.4
2.9
2.4 2.8
2.0 1.9
4.2
4.3
-10
-5
0
5
10
2000-2009 1985-2009 1960-2009 1900-2009
Premium vs Bonds (% p.a.) Premium vs Bills (% p.a.)
Figure 3
Returns and risk of major asset classes since 1900
27.5
8.0
4.1
12.2
5.5
1.7
7.2
5.0
1.2
-5
0
5
10
15
20
25
Real return (%) Nominal return (%) Standard deviation
Equities Bonds Bills

Source: Elroy Dimson, Paul Marsh and Mike Staunton, Credit Suisse Global Investment
Returns Sourcebook 2010

CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 Country profiles_41


South Africa
Golden
opportunity
The discovery of diamonds at Kimberley in 1870 and the
Witwatersrand gold rush of 1886 had a profound impact
on South Africa’s subsequent history. Today, South
Africa has 90% of the world’s platinum, 80% of its
manganese, 75% of its chrome and 41% of its gold, as
well as vital deposits of diamonds, vanadium and coal.
The 1886 gold rush led to many mining and financing
companies opening up, and to cater for their needs, the
Johannesburg Stock Exchange (JSE) opened in 1887.
Over the years since 1900, the South African equity
market has been one of the world’s most successful,
generating real equity returns of 7.2% per year, the
second-highest return among the Yearbook countries.
Today, South Africa is the largest economy in Africa,
with a sophisticated financial structure and the world’s
17th largest equity market. Back in 1900, South Africa,
together with several other Yearbook countries, would
have been deemed an emerging market. According to
index compilers, it has not yet emerged, and it today
ranks as the sixth-largest emerging market.
Gold, once the keystone of South Africa’s economy, has
declined in importance as the economy has diversified.
Resource stocks, however, are still a third of the JSE’s
capitalization. The largest JSE stocks are MTN, Sasol,
and Standard Bank.



Capital market returns for South Africa
Figure 1 shows that, over the last 110 years, the real value of equities,
with income reinvested, grew by a factor of 2126.9 as compared to 6.3
for bonds and 3.1 for bills. Figure 2 shows that, since 1900, equities
beat bonds by 5.4% and bills by 6.1% per year. Figure 3 shows that
the long-term real return on South African equities was an annualized
7.2% as compared to bonds and bills, which gave a real return of 1.7%
and 1.0% respectively. For additional explanations of these figures, see
page 27.
Figure 1
Annualized performance from 1900 to 2009
2,127
6.3
3.1
0
1
10
100
1,000
10,000
1900 10 20 30 40 50 60 70 80 90 2000 10
Equities Bonds Bills
Figure 2
Equity risk premium over 10 to 110 years
3.3
6.1 6.1
5.4
6.6
2.2
5.3
4.0
-10
-5
0
5
10
2000-2009 1985-2009 1960-2009 1900-2009
Premium vs Bonds (% p.a.) Premium vs Bills (% p.a.)
Figure 3
Returns and risk of major asset classes since 1900
22.6
12.5
7.2
10.4
6.7
1.7
6.3 6.0
1.0
-5
0
5
10
15
20
25
Real return (%) Nominal return (%) Standard deviation
Equities Bonds Bills

Source: Elroy Dimson, Paul Marsh and Mike Staunton, Credit Suisse Global Investment
Returns Sourcebook 2010

CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 Country profiles_42


Spain
Key to Latin
America
Spanish is the most widely spoken international
language after English, and has the fourth-largest
number of native speakers after Chinese, Hindi and
English. Partly for this reason, Spain has a visibility and
influence that extends way beyond its Southern
European borders, and carries weight throughout Latin
America.
The modern style of Spanish bullfighting is described as
daring and revolutionary, and that is an apt description
of real equity returns over the century. While the 1960s
and 1980s saw Spanish real equity returns enjoying a
bull market and ranked second in the world, the 1930s
and 1970s saw the very worst returns among our
countries.
Though Spain stayed on the sidelines during the two
world wars, Spanish stocks lost much of their real value
over the period of the civil war during 1936–39, while
the return to democracy in the 1970s coincided with the
quadrupling of oil prices, heightened by Spain’s
dependence on imports for 70% of its energy needs.
The Madrid Stock Exchange was founded in 1831 and it
is now the 11th largest in the world, helped by strong
economic growth since the 1980s. The major Spanish
companies retain strong presences in Latin America
combined with increasing strength in banking and
infrastructure across Europe. The largest stocks are
Banco Santander, Telefonica, and BBVA.



Capital market returns for Spain
Figure 1 shows that, over the last 110 years, the real value of equities,
with income reinvested, grew by a factor of 58.7 compared to 4.5 for
bonds and 1.5 for bills. Figure 2 shows that, since 1900, equities beat
bonds by 2.4% and bills by 3.4% per year. Figure 3 shows that the
long-term real return on Spanish equities was an annualized 3.8%
compared to bonds and bills, which gave a real return of 1.4% and
0.4%, respectively. For additional explanations of these figures, see
page 27.
Figure 1
Annualized performance from 1900 to 2009
59
4.5
1.5
0
1
10
100
1900 10 20 30 40 50 60 70 80 90 2000 10
Equities Bonds Bills
Figure 2
Equity risk premium over 10 to 110 years
4.5
3.4
2.4
3.7
5.5
0.5
3.0
8.5
-10
-5
0
5
10
2000-2009 1985-2009 1960-2009 1900-2009
Premium vs Bonds (% p.a.) Premium vs Bills (% p.a.)
Figure 3
Returns and risk of major asset classes since 1900
22.2
9.9
3.8
11.8
7.3
1.4
5.9
6.2
0.4
-5
0
5
10
15
20
25
Real return (%) Nominal return (%) Standard deviation
Equities Bonds Bills

Source: Elroy Dimson, Paul Marsh and Mike Staunton, Credit Suisse Global Investment
Returns Sourcebook 2010

CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 Country profiles_43


Sweden
Nobel prize
returns
Alfred Nobel bequeathed 94% of his total assets to
establish and endow the five Nobel Prizes (first awarded
in 1901), instructing that the capital be invested in safe
securities. Were Sweden to win a Nobel prize for its
investment returns, it would be for its achievement as
the only country to have real returns for equities, bonds
and bills all ranked in the top three.
Real Swedish equity returns have been supported by a
policy of neutrality through two world wars, and the
benefits of resource wealth and the development, in the
1980s, of industrial holding companies. Overall, they
have returned 6.2% per year, behind the two highest-
ranked countries, Australia and South Africa.
The Stockholm stock exchange was founded in 1863
and is the primary securities exchange of the Nordic
countries. It is the world’s 19th largest equity market
and, since 1998, has been part of the OMX grouping.
The largest SSE stocks are Nordea Bank, Ericsson, and
Svenska Handelsbank.
Despite the high rankings for real bond and bill returns,
current Nobel prize winners will rue the instruction to
invest in safe securities as the real return on bonds was
only 2.5% per year, and that on bills only 1.9% per
year. Had the capital been invested in domestic equities,
the winners would have enjoyed immense fortune as
well as fame.



Capital market returns for Sweden
Figure 1 shows that, over the last 110 years, the real value of equities,
with income reinvested, grew by a factor of 730.9 compared to 14.5 for
bonds and 8.2 for bills. Figure 2 shows that, since 1900, equities beat
bonds by 3.6% and bills by 4.2% per year. Figure 3 shows that the
long-term real return on Swedish equities was an annualized 6.2%
compared to bonds and bills, which gave a real return of 2.5% and
1.9%, respectively. For additional explanations of these figures, see
page 27.
Figure 1
Annualized performance from 1900 to 2009
731
14.5
8.2
0
1
10
100
1,000
1900 10 20 30 40 50 60 70 80 90 2000 10
Equities Bonds Bills
Figure 2
Equity risk premium over 10 to 110 years
-3.9
5.6
4.2
3.6
4.4
2.9
-1.0
6.4
-10
-5
0
5
10
2000-2009 1985-2009 1960-2009 1900-2009
Premium vs Bonds (% p.a.) Premium vs Bills (% p.a.)
Figure 3
Returns and risk of major asset classes since 1900
22.9
10.0
6.2
12.5
6.1
2.5
6.8
5.6
1.9
-5
0
5
10
15
20
25
Real return (%) Nominal return (%) Standard deviation
Equities Bonds Bills

Source: Elroy Dimson, Paul Marsh and Mike Staunton, Credit Suisse Global Investment
Returns Sourcebook 2010

CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 Country profiles_44


Switzerland
Traditional
safe haven
For a small country with just 0.1% of the world’s
population and 0.008% of its land mass, Switzerland
punches well above its weight financially and wins
several gold medals in the global financial stakes.
The Swiss stock market traces its origins to exchanges
in Geneva (1850), Zurich (1873) and Basel (1876). It is
now the world’s eighth-largest equity market,
accounting for 3.1% of total world value. Major listed
companies include world leaders such as Nestle,
Novartis and Roche.
Since 1900, Swiss equities have achieved a mid-ranking
real return of 4.3%, while Switzerland has been one of
the world’s three best-performing government bond
markets, with an annualized real return of 2.1%.
Switzerland has also enjoyed the world’s lowest inflation
rate: just 2.3% per year since 1900. Meanwhile, the
Swiss franc has been the world’s strongest currency.
Switzerland is, of course, one of the world’s most
important banking centers, and private banking has been
a major Swiss competence for over 300 years. Swiss
neutrality, sound economic policy, low inflation and a
strong currency have all bolstered the country’s
reputation as a safe haven. Today, close to 30% of all
cross-border private assets invested worldwide are
managed in Switzerland.



Capital market returns for Switzerland
Figure 1 shows that, over the last 110 years, the real value of equities,
with income reinvested, grew by a factor of 97.8 compared to 9.6 for
bonds and 2.4 for bills. Figure 2 shows that, since 1900, equities beat
bonds by 2.1% and bills by 3.4% per year. Figure 3 shows that the
long-term real return on Swiss equities was an annualized 4.3%
compared to bonds and bills, which gave a real return of 2.1% and
0.8%, respectively. For additional explanations of these figures, see
page 27.
Figure 1
Annualized performance from 1900 to 2009
98
9.6
2.4
0
1
10
100
1,000
1900 10 20 30 40 50 60 70 80 90 2000 10
Equities Bonds Bills
Figure 2
Equity risk premium over 10 to 110 years
-3.4
4.7
3.4
2.1 2.8
4.2
-0.3
6.3
-10
-5
0
5
10
2000-2009 1985-2009 1960-2009 1900-2009
Premium vs Bonds (% p.a.) Premium vs Bills (% p.a.)
Figure 3
Returns and risk of major asset classes since 1900
19.9
6.7
4.3
9.4
4.4
2.1
5.0
3.1 0.8
-5
0
5
10
15
20
25
Real return (%) Nominal return (%) Standard deviation
Equities Bonds Bills

Source: Elroy Dimson, Paul Marsh and Mike Staunton, Credit Suisse Global Investment
Returns Sourcebook 2010

CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 Country profiles_45


United Kingdom
Global
center
Organized stock trading in the UK dates from 1698.
This mostly took place in City of London coffee houses
until the London Stock Exchange was formally
established in 1801. By 1900, the UK equity market
was the largest in the world, and London was the
world’s leading financial center, specializing in global
and cross-border finance.
Early in the 20th century, the US equity market overtook
the UK, and nowadays, both New York and Tokyo are
larger than London as financial centers. What continues
to set London apart, and justifies its claim to be the
world’s leading international financial center, is the
global, cross-border nature of much of its business.
Today, London is the world’s banking center, with 550
international banks and 170 global securities firms
having offices in London. The London foreign exchange
market is the largest in the world, and London has the
world’s third-largest stock market, third-largest
insurance market, and sixth-largest bond market.
London is the world leader for derivatives traded over-
the-counter, with 36% of global turnover. It is the
world’s largest fund management center, managing
almost half of Europe’s institutional equity capital, and is
home to some 1,000 hedge funds. More than half of the
global foreign equity market and 70% of Eurobonds are
traded in London. It is also a major center for
commodities trading, shipping, and many other services.




Capital market returns for the United Kingdom
Figure 1 shows that, over the last 110 years, the real value of equities,
with income reinvested, grew by a factor of 286.9 compared to 4.3 for
bonds and 3.1 for bills. Figure 2 shows that, since 1900, equities beat
bonds by 3.9% and bills by 4.2% per year. Figure 3 shows that the
long-term real return on UK equities was an annualized 5.3% compared
to bonds and bills, which gave a real return of 1.3% and 1.0%,
respectively. For additional explanations of these figures, see page 27.
Figure 1
Annualized performance from 1900 to 2009
287
4.3
3.1
0
1
10
100
1,000
1900 10 20 30 40 50 60 70 80 90 2000 10
Equities Bonds Bills
Figure 2
Equity risk premium over 10 to 110 years
-3.1
4.0
4.2
3.9
3.3
1.0
-2.5
3.1
-10
-5
0
5
10
2000-2009 1985-2009 1960-2009 1900-2009
Premium vs Bonds (% p.a.) Premium vs Bills (% p.a.)
Figure 3
Returns and risk of major asset classes since 1900
20.1
9.4
5.3
13.7
5.3
1.3
6.3
5.0 1.0
-5
0
5
10
15
20
25
Real return (%) Nominal return (%) Standard deviation
Equities Bonds Bills

Source: Elroy Dimson, Paul Marsh and Mike Staunton, Credit Suisse Global Investment
Returns Sourcebook 2010

CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 Country profiles_46


United States
Financial
superpower
In the 20th century, the United States rapidly became
the world’s foremost political, military, and economic
power. After the fall of communism, it became the
world’s sole superpower.
The USA is also a financial superpower. It has the
world’s largest economy, and the dollar is the world’s
reserve currency. Its stock market accounts for 41% of
total world value, which is over five times as large as
Japan. The USA also has the world’s largest bond
market.
US financial markets are also the best documented in
the world and, until recently, most of the long-run
evidence cited on historical asset returns drew almost
exclusively on the US experience. Since 1900, US
equities and US bonds have given real returns of 6.2%
and 1.9%, respectively.
There is an obvious danger of placing too much reliance
on the excellent long run past performance of US
stocks. The New York Stock Exchange traces its origins
back to 1792. At that time, the Dutch and UK stock
markets were already nearly 200 and 100 years old,
respectively. Thus, in just a little over 200 years, the
USA has gone from zero to a 41% share of the world’s
equity markets.
Extrapolating from such a successful market can lead to
“success” bias. Investors can gain a misleading view of
equity returns elsewhere, or of future equity returns for
the USA itself. That is why this Yearbook focuses on
global returns, rather than just those from the USA.



Capital market returns for the United States
Figure 1 shows that, over the last 110 years, the real value of equities,
with income reinvested, grew by a factor of 726.6 compared to 8.2 for
bonds and 2.8 for bills. Figure 2 shows that, since 1900, equities beat
bonds by 4.2% and bills by 5.2% per year. Figure 3 shows that the
long-term real return on US equities was an annualized 6.2% compared
to bonds and bills, which gave a real return of 1.9% and 0.9%,
respectively. For additional explanations of these figures, see page 27.
Figure 1
Annualized performance from 1900 to 2009
727
8.2
2.8
0
1
10
100
1,000
1900 10 20 30 40 50 60 70 80 90 2000 10
Equities Bonds Bills
Figure 2
Equity risk premium over 10 to 110 years
-7.4
4.0
5.2
4.2
2.3 0.7
-2.9
5.7
-10
-5
0
5
10
2000-2009 1985-2009 1960-2009 1900-2009
Premium vs Bonds (% p.a.) Premium vs Bills (% p.a.)
Figure 3
Returns and risk of major asset classes since 1900
20.4
9.3
6.2
10.2
5.0
1.9
4.7 3.9 0.9
-5
0
5
10
15
20
25
Real return (%) Nominal return (%) Standard deviation
Equities Bonds Bills

Source: Elroy Dimson, Paul Marsh and Mike Staunton, Credit Suisse Global Investment
Returns Sourcebook 2010

CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 Country profiles_47


World
Globally
diversified
It is interesting to see how the 19 Yearbook countries
have performed in aggregate over the long run. We have
therefore created a 19-country world equity index
denominated in a common currency, in which each
country is weighted by its starting-year equity market
capitalization, or in years before capitalizations were
available, by its GDP. We also compute a 19-country
world bond index, with each country weighted by GDP.
These indexes represent the long-run returns on a
globally diversified portfolio from the perspective of an
investor in a given country. The charts opposite show
the returns for a US global investor. The world indexes
are expressed in US dollars; real returns are measured
relative to US inflation; and the equity premium versus
bills is measured relative to US treasury bills.
Over the 110 years from 1900 to 2009, Figure 1 shows
that the real return on the world index was 5.4% per
year for equities, and 1.7% per year for bonds. It also
shows that the world equity index had a volatility of
17.8% per year. This compares with 23.5% per year for
the average country and 20.4% per year for the USA.
The risk reduction achieved through global diversification
remains one of the last “free lunches” available to
investors.



Capital market returns for World
Figure 1 shows that, over the last 110 years, the real value of equities,
with income reinvested, grew by a factor of 331.4 as compared to 6.4
for bonds and 2.8 for bills. Figure 2 shows that, since 1900, equities
beat bonds by 3.7% and bills by 4.4% per year. Figure 3 shows that
the long-term real return on World equities was an annualized 5.4% as
compared to bonds and bills, which gave a real return of 1.7% and
0.9% respectively. For additional explanations of these figures, see
page 27.
Figure 1
Annualized performance from 1900 to 2009
331
6.4
2.8
0
1
10
100
1,000
1900 10 20 30 40 50 60 70 80 90 2000 10
Equities Bonds US Bills
Figure 2
Equity risk premium over 10 to 110 years
-6.6
3.8
4.4
-0.9
0.9
3.7
5.1
-1.8
-10
-5
0
5
10
2000-2009 1985-2009 1960-2009 1900-2009
Premium vs Bonds (% p.a.) Premium vs US Bills (% p.a.)
Figure 3
Returns and risk of major asset classes since 1900
17.8
8.6
5.4
10.4
4.7
1.7
4.7 3.9 0.9
-5
0
5
10
15
20
25
Real return (%) Nominal return (%) Standard deviation
Equities Bonds US Bills

Source: Elroy Dimson, Paul Marsh and Mike Staunton, Credit Suisse Global Investment
Returns Sourcebook 2010

CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 Country profiles_48


World ex-US
Rest of the
world
In addition to the two world indexes, we also construct
two world indexes that exclude the USA, using exactly
the same principles. Although we are excluding just one
out of 19 countries, the USA accounts for roughly half
the total equity market capitalization of our 19 countries,
so the 18-country world ex-US equity index represents
approximately half the total value of the world index.
We noted above that, until recently, most of the long-
run evidence cited on historical asset returns drew
almost exclusively on the US experience. We argued
that focusing on such a successful economy can lead to
“success” bias. Investors can gain a misleading view of
equity returns elsewhere, or of future equity returns for
the USA itself.
The charts opposite confirm this concern. They show
that, from the perspective of a US-based international
investor, the real return on the world ex-US equity index
was 5.0% per year, which is 1.2% per year below that
for the USA. This suggests that, although the USA has
not been a massive outlier, it is nevertheless important
to look at global returns, rather than just focusing on the
USA.



Capital market returns for the World ex-US
Figure 1 shows that, over the last 110 years, the real value of equities,
with income reinvested, grew by a factor of 214.8 as compared to 3.7
for bonds and 2.8 for bills. Figure 2 shows that, since 1900, equities
beat bonds by 3.8% and bills by 4.0% per year. Figure 3 shows that
the long-term real return on World ex-US equities was an annualized
5.0% as compared to bonds and bills, which gave a real return of 1.2%
and 0.9% respectively. For additional explanations of these figures, see
page 27.
Figure 1
Annualized performance from 1900 to 2009
215
3.7
2.8
0
1
10
100
1,000
1900 10 20 30 40 50 60 70 80 90 2000 10
Equities Bonds US Bills
Figure 2
Equity risk premium over 10 to 110 years
-5.2
4.2
4.0
3.8
0.6
-1.3
-0.4
5.2
-10
-5
0
5
10
2000-2009 1985-2009 1960-2009 1900-2009
Premium vs Bonds (% p.a.) Premium vs US Bills (% p.a.)
Figure 3
Returns and risk of major asset classes since 1900
5.0
8.1
20.5
1.2
4.2
14.3
0.9 3.9 4.7
-5
0
5
10
15
20
25
Real return (%) Nominal return (%) Standard deviation
Equities Bonds US Bills

Source: Elroy Dimson, Paul Marsh and Mike Staunton, Credit Suisse Global Investment
Returns Sourcebook 2010

CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 Country profiles_49


Europe
The Old
World
The Yearbook documents investment returns for 13
European countries. They comprise eight euro currency
area states (Belgium, Finland, France, Germany,
Ireland, Italy, the Netherlands and Spain) and five
European markets that are outside the euro area
(Denmark, Sweden and the UK; and from outside the
EU, Norway and Switzerland). Loosely, we might argue
that these 13 countries come from the Old World.
It is interesting to assess how well European countries
as a group have performed, compared with our world
index. We have therefore constructed a 13-country
European index using the same methodology as for the
world index. As with the world index, this European
index can be designated in any desired common
currency. For consistency, the figures opposite are in
US dollars from the perspective of a US international
investor.
Figure 1 opposite shows that the real equity return on
European equities was 4.8%. This compares with 5.4%
for the world index, indicating that the Old World
countries have underperformed. This may relate to the
destruction from the two world wars, where Europe was
at the epicenter; or to the fact that many of the New
World countries were resource-rich; or perhaps to the
greater vibrancy of New World economies.



Capital market returns for Europe
Figure 1 shows that, over the last 110 years, the real value of equities,
with income reinvested, grew by a factor of 167.9 as compared to 2.5
for bonds and 2.8 for bills. Figure 2 shows that, since 1900, equities
beat bonds by 3.9% and bills by 3.8% per year. Figure 3 shows that
the long-term real return on European equities was an annualized 4.8%
as compared to bonds and bills, which gave a real return of 0.8% and
0.9% respectively. For additional explanations of these figures, see
page 27.
Figure 1
Annualized performance from 1900 to 2009
168
2.5
2.8
0
1
10
100
1,000
1900 10 20 30 40 50 60 70 80 90 2000 10
Equities Bonds US Bills
Figure 2
Equity risk premium over 10 to 110 years
-5.7
4.6
3.8 3.9
1.3
1.1
0.4
8.0
-10
-5
0
5
10
2000-2009 1985-2009 1960-2009 1900-2009
Premium vs Bonds (% p.a.) Premium vs US Bills (% p.a.)
Figure 3
Returns and risk of major asset classes since 1900
21.6
7.9
4.8
15.4
3.8 0.8 4.7 3.9 0.9
-5
0
5
10
15
20
25
Real return (%) Nominal return (%) Standard deviation
Equities Bonds US Bills

Source: Elroy Dimson, Paul Marsh and Mike Staunton, Credit Suisse Global Investment
Returns Sourcebook 2010


CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 Country profiles_50
Elroy Dimson is Emeritus Professor of Finance at
London Business School, where he has been an elected
Governor, Chair of the Finance and Accounting areas,
and Dean of the School’s MBA and EMBA programmes.
He holds board and investment committee positions with
Guy’s & St Thomas’ Charity, The Foundation for Social
Entrepreneurs, London University, and until recently, the
Norwegian Government Pension Fund. He is a Director
and Past President of the European Finance Association
and has been elected to membership of the Financial
Economists Roundtable. He has been appointed to
Honorary Fellowships of the UK Society of Investment
Professionals and of the Institute of Actuaries. Dr
Dimson has published articles in Journal of Business,
Journal of Finance, Journal of Financial Economics,
Journal of Portfolio Management, Financial Analysts
Journal, and other journals. His PhD in Finance is from
London Business School.
Paul Marsh is Emeritus Professor of Finance at London
Business School. Within London Business School he has
been Chair of the Finance area, Deputy Principal,
Faculty Dean, an elected Governor and Associate Dean
Finance Programmes. He has advised on several public
enquiries, and is currently a Director of Aberforth
Smaller Companies Trust and, previously, of M&G and
Majedie Investments, and has acted as a consultant to a
wide range of financial institutions and companies. Dr
Marsh has published articles in Journal of Business,
Journal of Finance, Journal of Financial Economics,
Journal of Portfolio Management, Harvard Business
Review, and other journals. His PhD in Finance is from
London Business School. With Elroy Dimson, he co-
designed the FTSE 100-Share Index and ABN AMRO’s
Hoare Govett Smaller Companies Index, produced since
1987 at London Business School.
Mike Staunton is Director of the London Share Price
Database, a research resource of London Business
School, where he produces the London Business School
Risk Measurement Service. He has taught at universities
in the United Kingdom, Hong Kong and Switzerland. Dr
Staunton is co-author with Mary Jackson of Advanced
Modelling in Finance Using Excel and VBA, published by
Wiley and writes a regular column for Wilmott magazine.
He has had articles published in Journal of Banking &
Finance, Financial Analysts Journal, and Journal of the
Operations Research Society. His PhD in Finance is
from London Business School.
Jonathan Wilmot is a Managing Director of Credit
Suisse and Chief Global Strategist in the Investment
Banking division of Credit Suisse. After reading
Philosophy, Politics and Economics (PPE) at Oxford, Mr.
Wilmot worked for Bank of America and Merrill Lynch as
a foreign exchange economist and bond analyst before
joining Credit Suisse First Boston in 1985. In the
subsequent 25 years, he has established a reputation as
one of the best and most original strategists in the
industry. His work focuses on both secular and cyclical
trends in the global economy, and their implications for
policy, capital flows, and investment strategy across all
major asset classes. He is a member of the group’s
Global Economics and Strategy group, and travels
extensively in Europe, the Far East, and America to meet
with the world’s leading asset managers, pension funds,
official institutions, and hedge funds.


About the authors
Publisher
Credit Suisse Group AG
Credit Suisse Research Institute
Paradeplatz 8
CH-8070 Zurich
Switzerland
Imprint
Responsible authors
Elroy Dimson, London Business School, edimson@london.edu
Paul Marsh, London Business School, pmarsh@london.edu
Mike Staunton, London Business School, mstaunton@london.edu
Jonathan J. Wilmot, Credit Suisse, jonathan.wilmot@credit-suisse.com
Editorial deadline
3 February 2010
ISBN 978-3-9523513-2-1
The Credit Suisse Global Investment Returns Yearbook 2010 is distributed to Credit Suisse clients by the publisher, and to non-clients by London Business School. The ac-
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2010. It is also distributed to Credit Suisse clients by the publisher, and to non-clients by London Business School. Please address requests to Patricia Rowham, London
Business School, Regents Park, London NW1 4SA, United Kingdom, tel +44 20 7000 7000, fax +44 20 7000 7001, e-mail prowham@london.edu. E-mail is preferred.
Copyright © 2010 Elroy Dimson, Paul Marsh and Mike Staunton. All rights reserved. No part of this document may be reproduced or used in any form, including graphic,
electronic, photocopying, recording or information storage and retrieval systems, without prior written permission from the copyright holders. To obtain permission, contact
the authors with details of the required extracts, data, charts, tables or exhibits. In addition to citing this Yearbook, documents that incorporate reproduced or derived materi -
als must include a reference to Elroy Dimson, Paul Marsh and Mike Staunton, Triumph of the Optimists: 101 Years of Global Investment Returns, Princeton University Press,
2002. At a minimum, each chart and table must carry the acknowledgement Copyright © 2010 Elroy Dimson, Paul Marsh and Mike Staunton. If granted permission, a copy
of published materials must be sent to the authors at London Business School, Regents Park, London NW1 4SA, United Kingdom.
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Nothing in this material constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to your individual
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CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010_51
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Photos: istockphoto/Bertlmann. Cover: istockphoto/szefei

Contents
05 13 21 Emerging markets Economic growth Value in the USA 38 Netherlands 39 New Zealand 40 Norway 41 South Africa 27 Country profiles 28 Australia 29 Belgium 30 Canada 31 Denmark 32 Finland 33 France 34 Germany 35 Ireland 36 Italy 37 Japan 50 Authors 51 Imprint/Disclaimer 42 Spain 43 Sweden 44 Switzerland 45 United Kingdom 46 United States 47 World 48 World ex-US 49 Europe

CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 _3

For more information on the findings of the Credit Suisse Global Investment Returns Yearbook 2010, please contact either the authors (see contact information on page 51) or: Richard Kersley, Head of Equity Research Europe Product at Credit Suisse Investment Banking, richard.kersley@credit-suisse.com Michael O'Sullivan, Head of UK Research, Global Asset Allocation at Credit Suisse Private Banking, michael.o'sullivan@credit-suisse.com To order printed copies of the Yearbook and the Sourcebook, see page 51.

The Credit Suisse Global Investment Returns Yearbook 2010 offers more than 100 years of data on financial market returns in 19 countries, putting into long-run perspective the current outlook for asset prices at a time of global economic recovery and high levels of country indebtedness. This year Elroy Dimson, Paul Marsh and Mike Staunton of London Business School add Finland and New Zealand to their database of long-term returns and risks, alongside the 17 markets previously covered. The scale of analysis extends far beyond what can be contained in this Yearbook, so an accompanying volume (the Global Investment Returns Sourcebook) contains detailed tables, charts, listings, background, sources and references for every country. More specifically, in the context of the already strong growth in emerging markets and the rebuilding of developed economies, they examine two issues – first, what kinds of return and risk levels should we expect from emerging market equities and, second, what the relationship between stock returns and economic growth is. While emerging market equity returns in 2009 were spectacular, this analysis suggests that, throughout history, emerging market returns have been closer to developed markets than many investors would now expect. The crucial issue is the extent to which emerging markets have undergone a structural improvement in terms of their risk/return profile and the levels of economic growth they now enjoy. The second article in the Yearbook helps to shed some light here. While we observe a positive correlation between longterm economic growth and stock returns, historic per capita GDP growth has a negative correlation with both stock returns and dividend growth. If anything, stock market moves are a much better indicator of future GDP growth. In fact, paradoxically, an investment strategy of investing in countries that have shown weakness in economic growth has historically earned high returns. 2009 is a case in point. In addition, the Yearbook contains an assessment by Jonathan Wilmot, Chief Global Strategist for Investment Banking, of the fundamental outlook for the US market in the context of a globalized world. He notes that the US market is strongly linked to emerging world growth as nearly a quarter of total US profits and about 30% of S&P 500 sales are generated abroad. He concludes that the outlook for US equities is positive, given continuing globalization, emerging world growth and rapid technological change. We are proud to be associated with the work of Elroy Dimson, Paul Marsh and Mike Staunton, whose book Triumph of the Optimists (Princeton University Press, 2002) has had a major influence on investment analysis. The Yearbook is one of a series of publications from the Credit Suisse Research Institute, which links the internal resources of our extensive research teams with world-class external research.
Giles Keating
Head of Private Banking Global Research giles.keating@credit-suisse.com

Stefano Natella
Head of Global Equity Research, Investment Banking stefano.natella@credit-suisse.com

CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010_4

Photo: istockphoto/holgs

CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 _5

Emerging markets
The opening years of the twenty-first century have been a lost decade for equity investors, with the MSCI world index giving a return close to zero. However, emerging markets have been a bright spot, with an annualized return of 10%. Looking ahead, can we expect this differential to persist? And what role should emerging markets now have in investors’ portfolios? Answering this question is crucial for all individuals who take a global view of stock-market opportunities.

Elroy Dimson, Paul Marsh and Mike Staunton, London Business School

Emerging markets have been the hot topic of the past year, but the story line has evolved. In the turmoil of 2008 and early 2009, they crashed along with, and more than, other risk assets, shaking investors’ faith in the decoupling theory and in diversification as a way of safeguarding portfolio values. In the staggering equity market recovery since March 2009 (see Figure 1), the picture changed. Belief in decoupling was back as emerging markets recovered sooner, faster and further, and became the world’s engine of growth and recovery. The belief that “future growth means higher returns” gained momentum. Meanwhile, the financial crisis shattered the preconception that the USA and other developed markets were relative safe havens. Investors now viewed the risk gap between emerging and developed markets as much smaller. Are these perceptions correct, and have events been so paradigm-changing that emerging markets are now the only game in town? In this article, we seek to answer these questions by putting the spotlight on the performance of emerging markets, and their role in a global equity portfolio. In doing so, and consistent with the aims of the Yearbook, we take a long-run view. A short-term focus on current perceptions and market beliefs can seriously detract from investment performance. Those who follow the herd are destined to sell markets after they have fallen, and to buy after a rise.

By examining markets over the longest possible period, modern events can be put in their proper context. This is the role of the Yearbook, with its 110 years of stock-market history now expanded to cover 19 countries, and the even broader database of 83 developed and emerging markets that we have assembled for this and the accompanying article. What is an emerging market? There is no watertight definition of emerging markets. The term was coined in the early 1980s by the International Finance Corporation (IFC) to refer to middle-to-higher income developing countries in transition to developed status, which were often undergoing rapid growth and industrialization, and which had stock markets that were increasing in size, activity and quality. In practice, it is the major index providers, in consultation with their clients, who define which markets are deemed emerging and which are developed. FTSE International distinguishes between advanced and secondary emerging markets, while S&P and MSCI identify a category of pre-emerging, frontier markets. But the key distinction is between emerging and developed. Index providers judge this using their own criteria, such as gross domestic product (GDP) per capita, the regulatory environment, and market size, quality, depth and breadth. Yet, despite the different criteria, the resultant classifications are almost identical.

although most countries have grown considerably in terms of GDP per capita. A combination of several of these factors helps to explain why Argentina. The notion that emerging status can largely be captured by a ranking of GDP per capita allows us to revisit countries back in 1900 at the start of the Yearbook coverage to see which stock markets existing then might have been deemed emerging at that time. Argentina and Pakistan. These include dictatorship. Venezuela and Zimbabwe. we rank all countries by their estimated GDP per capita in 1900 using Maddison’s historical database. which is already in transition to developed status. Using this criterion. FTSE upgraded Israel to developed in 2008. which in 1900 had a GDP per capita similar to that of France. Thus. but retains it in their Emerging Plus BMI index. with both MSCI and S&P deeming them to be frontier markets. disastrous economic policies and hyperinflation. while S&P also categorizes it as developed. Indeed. Five markets moved from emerging to developed: Finland. only seven of the 38 countries with equity markets in 1900 changed status over the following 110 years. To do this. and communism. The S&P and FTSE taxonomies are otherwise almost identical to MSCI’s. there have been few upgrades to developed status. Using the most recent IMF projections for end-2009. Despite multiple factors used by index compilers to determine the boundary between emerging and developed status. There are numerous historical reasons why many emerging markets have emerged slowly. The only developed markets with lower GDP per capita are Portugal (USD 20.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 _6 Figure 1 Emerging markets’ performance since March 2009 and over the decade 2000 09 Source: MSCI Barra. more emerging markets have been downgraded to frontier than have been upgraded to developed. Two moved from developed to emerging: Argentina and Chile. while the remaining two. Clearly several markets have failed to emerge as rapidly as once hoped. Of the remaining 31 countries. emerging markets are not new.600) and Korea (USD 16. and why others have suffered setbacks. 17 would have been deemed developed in 1900 and remain developed today. Although the term “emerging markets” dates back only to the early 1980s. a single variable does an excellent job of discrimination: GDP per capita. civil strife. during much of the nineteenth century. Sri Lanka.000 effectively marked the boundary between emerging and developed markets. We assess the cutoff by taking the same percentile (30%) of the distribution that corresponds to the USD 25. and higher than Sweden and Norway. Pakistan. Jordan. The only emerging market listed in Figure 1 with GDP per capita higher than this was Israel (USD 29. wars. the exceptions being that S&P views Colombia as a frontier market. we ranked over 100 countries with active stock markets by their GDP per capita. Colombia. Indeed.700). and Greece is now on some watch lists for downgrade. and FTSE promoted South Korea in 2009. are classified as emerging by FTSE. Apart from Israel and Korea.500) which are a 2001 promotion and a transitional case. . whose stock market opened in 1911.000 cutoff in 2010. FTSE International Hungary Turkey Indonesia India Brazil Poland Russia Mexico Colombia South Korea South Africa MSCI Emerging Peru Thailand Taiwan China Egypt Argentina Czech Republic Chile Pakistan MSCI World Philippines Malaysia Israel Morocco 0 198 174 170 153 133 130 129 125 117 116 109 108 107 102 90 88 85 81 81 81 77 74 68 64 55 2 25 50 75 100 125 150 175 200 Return from 9 Mar–31 Dec 2009 Annualized return: 2000–09 Figure 1 lists the 24 countries currently classified as emerging markets by the major index providers. the United States would have been regarded as a classic emerging market. In the 30 or so years since emerging market indices first appeared. only Portugal and Greece have advanced. S&P’s downgrades include Argentina. more recently. Nigeria. their relative rankings on this metric have changed far more slowly. corruption. Portugal and Greece. This gives a total of six promotions over 110 years. Japan and Hong Kong plus. with MSCI following in 2010. currently in transition. has also moved from emerging to developed status. plus Israel and Korea. while 14 were emerging and are still in that category 110 years later. MSCI views 22 of these as emerging. respectively. A cut-off point of USD 25. Singapore. currently in transition.

including China. Poland and Russia. "How Should Private Investors Diversify?". just projections. In the following article. these. How important are emerging markets? Emerging and frontier markets are far too big to ignore. three of the five constituents with the largest market capitalizations are from emerging markets. Many other markets that were on the brink of becoming developed in the early twentieth century. of course. Nor should we write off the prospects for the developing world and its stock markets. No fewer than 11 of the top 100. which is currently China’s largest company and the second largest oil company in the world after ExxonMobil. suffered the double blow of wartime destruction and the post-WWII communist yoke. In many markets. with. Market weightings In Forbes’ 2009 ranking of the top global companies. Mannheim University 2009. ranked by total market capitalization. frontier markets are excluded (a) GDP weights 100% 29 75% 12 50% 30 25% 29 0% 1980 1985 1990 1995 2000 2005 2009 Emerging markets Developed: Europe Developed: Asia Pacific Developed: North America (b) Market capitalization weights 100% 12 16 75% 28 50% 25% 45 0% 1980 1985 1990 1995 2000 2005 2009 Emerging markets Developed: Europe Developed: Asia Pacific Developed: North America . and 31% of its GDP (almost half that of developed markets). MSCI and FTSE. it is clear that the world order is changing fundamentally and quite rapidly. taken as a group. Over an interval of three decades. there are still restrictions on which stocks foreigners can hold. therefore. Perhaps surprisingly. such as Hungary. 46% of its land mass (twice that of developed markets). the weighting of emerging markets in the all-world indices published by MSCI and FTSE is only some 12%. their real GDP growth has been much faster than in developed markets. GDP information is from Mitchell. While they broadly reflect the consensus view. Figure 2 Alternative emerging market weights.5%. The lower panel confirms the dramatic increase in the market capitalization of emerging markets from some 2% in 1980 to 12% by end-2009. and many other countries. many large emerging market stocks have only a small proportion of their shares in public hands.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 _7 is now categorized by MSCI as just a frontier market. Maddison and IMF. Nevertheless. are from China more than from any other country in the world apart from the USA. emerging markets have been accident prone in the past. market capitalization data is from S&P. And. 1980–2010 Source: Adapted from Jacobs et al. especially the BRICs. They account for more than 70% of the world’s population (over five times that of developed markets). Figure 2 compares the weighting of emerging equity markets to that of developed markets on two criteria: in the upper panel market size is measured by GDP. and in the lower panel by market capitalization. we cite a set of projections for future GDP growth provided to us by PricewaterhouseCoopers as an update to their recent report on economic growth (see page 14). This is because these indices reflect the freefloat investable universe from the perspective of a global investor. and could suffer setbacks in future. Chinese ‘A’ shares still being inaccessible to most investors. These are. Petrochina. with China expected to displace the USA as the world’s largest economy by around 2020. Since the fall of the Berlin Wall twenty years ago. will continue to grow rapidly. for example. Similarly. These projections show the by now familiar consensus view that key emerging markets. Czechoslovakia. The upper panel shows how the emerging markets’ share of global GDP has grown discernibly to the point where a worldwide GDP-weighted portfolio would now hold almost 30% of assets in emerging markets. has a free float weighting of just 2. have joined the ranks of the rapidly re-emerging markets. and with India overtaking the USA by 2050.

. from 31 October 2008 onwards. today’s emerging and frontier markets will become major constituents of the all-world portfolio of 2050. Even if emerging market capitalization grew only in line with GDP.5%.000 S&P IFCG Emerging* starts at 100 at end-75 1. The S&P/IFCG Composite starts at end-1984 with 17 constituent countries. S&P/IFCI EM Composite MSCI EM Index If the PwC projections are realized. Overall. Consequently. and buy more of an asset after its valuation has risen. they were mostly ahead. there have been no appreciable deviations between the performances of the broader S&P/IFCG and the two investable indices. today’s emerging markets could easily account for 40%–50% of total world capitalization by 2050. aimed to cover 70% 80% of each country’s capitalization. However. However. From 1992 onward. Thus. One can also ask who has earned this higher return from emerging markets. *From 31 December 1975 until 31 December 1984. We extended it back to end-1975 using IFC country back-histories. comprising S&P/IFCG constituents that were legally and practically open to foreign investors.215 100 1975 1980 1985 1990 1995 2000 2005 2009 S&P/IFCG EM Composite* 9.000 S&P IFCI Emerging starts: rebased to end-88 value MSCI World 11. an annualized return of 9.446 3.215 by end-2009.037 2. and has varied depending on the chosen end-date.a. 1975–2009 Source: Standard & Poor’s.6% p. This is a further drag on achievable emerging market returns. Many investors chase past performance. while brief by Yearbook 110-year standards. who by definition must hold each market in proportion to its free-float capitalization. Authors’ analysis. and continue after its demise in 2008 by linking it to its successor. However. but does the long-term record match up to these performance claims? The IFC pioneered the first emerging market indices in 1981. emerging markets were behind their developed counterparts. This was followed by five years of strong performance. MSCI World Index 10. from 31 December 1984 until 31 October 2008. Then. emerging markets slightly underperformed. while trading costs shrink when emerging markets are hot. MSCI and FTSE also introduced similar series. emerging markets underperformed over the period 1976 87. by end-1998. but by mid-2008 the gap was again small. For example. both with index values rebased to the level of the MSCI World on the respective index start-dates. However.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 _8 Figure 3 Emerging markets performance. over the entire 34-year period. Markets tend to become more open to foreign investment and free-float rises as firms become less closely held. It is possible that long-term performance is flattered by the attention awarded to emerging markets in the light of their recent high returns. until end-2002. one might decide to invest in national markets in proportion to each country’s GDP. The red line shows that an equivalent investment in developed markets proxied by the MSCI World index gave a terminal value of USD 3. this is not the full picture. MSCI Barra. the outperformance was smaller than some might imagine. it would account for around 30% of the world total by 2050. The resulting 34-year record of emerging market returns. In the late 1980s. Looking ahead. the ratio of country capitalization to GDP tends to rise as markets develop due to increased equity issuance and IPOs. largely because they categorized Korea and Taiwan as non-investable. Long-term performance and emerging market indices Emerging markets are often sold on the basis of superior returns compared to developed markets. it is the S&P/IFCG Emerging Markets Composite index. the S&P/IFCI (Investable) indices were launched.a.6%. later renamed S&P/IFCG. Its IFCG (Global) indices. In the 2009 recovery.420 9. The purple line in Figure 3 shows the MSCI Emerging Markets index and the light blue line shows the S&P/IFCI Composite.5% p. the S&P/IFCG EM Composite index has been constructed from the S&P/IFCG country back histories and weights.037 and an annualized return of 10. the S&P Emerging Plus BMI Index. is lengthy by emerging market norms. but the gap was narrow. this strategy is impossible for global investors in total. but outperformed on a cumulative basis since. money-weighted performance is inferior to index returns. the investable emerging market indices greatly outperformed the S&P/IFCG and MSCI World. In. it is the S&P Emerging Plus BMI Index MSCI Emerging starts: rebased to end-87 value MSCI World 10. The dark blue line in Figure 3 shows that USD 100 invested at end-1975 in emerging markets became USD 2. emerging markets pulled ahead. Given these factors. From launch through 1991. liquidity dries up and costs expand after a decline. addition.

This is due to the outlying returns from a few. Second. What matters is how much an incremental holding in emerging markets contributes to the risk of their overall portfolio. It seems inconceivable that investors have not yet woken to this story. increases in market capitalization are not the same thing as portfolio appreciation. although their risk has fallen steadily from the 1980s through to the current decade. emerging market returns had an annualized standard deviation of 25%. Second. or that the implications of this are not already fully impounded in emerging market stock prices. even over the most recent decade. perhaps surprisingly. we look at the data. while the dark blue bars show the MSCI World index of developed markets. as discussed earlier. Of these. Sixth. over the most recent decade. The gray bars show the emerging markets index. For global investors. but they underperformed in the 1980s and 1990s. coupled with their robust GDP growth. None of these factors is necessarily a source of added value for holders of listed shares. Germany and Japan were cited as premier models of how GDP can grow through bank.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 _9 Growth and stock returns The recent excellent performance from emerging market equities. they beat developed markets by 10% per year. family. but outpaced developed markets by only 0. which is not the same as growth in stock-market capitalization. Third. GDP reflects the level of real activity in the economy. Despite this decline. For example. and could in principle grow in the absence of a stock market. the average emerging market had a volatility of 32. particular emerging market companies may be non-investable or have limited free-float.5% versus 23. financing. if there is a consensus that emerging market growth will be higher. emerging market indices were being calculated for a much wider set of 29 markets. demutualization. Fifth. then this ought already to be reflected in stock prices. and that will impair portfolio returns. the Alternative Investment Market in the UK has grown significantly in market capitalization by attracting foreign companies that contribute to the GDP of countries other than Britain. emerging markets have been viewed as riskier than developed markets. emerging markets gave similar returns to those of developed markets. The second. The group as a whole enjoyed faster growth. Holding a diversified portfolio of emerging markets is still appreciably riskier than a diversified portfolio of developed countries Individual emerging markets (light blue bars) are on average much riskier than individual developed markets (red bars). investors who favor China can be expected to bid stocks up to a level that impounds expected growth. Fourth. Similarly. Some have even claimed that developed markets are now riskier. namely. cross-holding or domestic investors may enjoy value increases. compared with 17% for the MSCI World. Although the gap has narrowed somewhat. IFC was compiling indices for 11 emerging markets. Unless an investor is blessed with clairvoyance. has shifted perceptions. Over the 15 years since. Despite this truly impressive overall growth. and as mentioned above listings by companies that might otherwise be traded elsewhere. as we show in our companion article. If investors wait until there is a consensus that growth will be high. and not stock-market. While government. the link between GDP growth and stock returns is empirically far weaker than many suppose. individual markets can be exceptions. Third. Fifth. while Argentina and Zimbabwe suffered a real decline in GDP. and the risk gap is now seen as smaller. The equivalent bars on the right hand side of Figure 4 show that the emerging markets index has been consistently more volatile than the MSCI World. they will have to pay more. The first caveat is that. And last. three grew more slowly than developed markets over the next 30 years. In the 2000s. initial public offerings. This is measured by the beta or sensitivity of the emerging markets index to global markets. deleveraging. Fourth. the strong past and projected economic growth of emerging markets has been common knowledge for many years. we are referring to growth in each country’s real economy. Investors can be expected to trade until there are about as many who think an asset is overpriced as underpriced. the S&P/IFCG Composite from 1976 86 and the MSCI Emerging thereafter. smaller emerging markets. as long as they hold a diversified portfolio of emerging markets. Market capitalization can grow through privatization. Turning to the first of these assertions. even the higher volatility of the emerging markets index need not in itself concern them. First. which now included China and Russia. however. In the late 1970s. while emerging markets as a whole have enjoyed higher economic growth. with its epicenter in developed markets. Indeed.7% per year. the companies that benefit from emerging market growth may be in the developed world. and fundamental caveat is that. By end-1994. . there is no evidence that GDP growth is useful as a predictor of superior stock-market returns. Conversely. four emerging markets fell behind their developed counterparts. The left hand side of Figure 4 shows the returns by decade. Only two decades ago. Figure 4 shows the historical return and risk from emerging and developed markets. equity issuance by listed companies. By 1980. To investigate this. it is this volatility that explains why the equally weighted average emerging market return can diverge so much from the weighted index return (compare the light blue bars with the gray bars on the left hand side of the figure). Indeed. multinationals in leading economies may be relying on growth in emerging countries. the supposed link between economic growth and stock-market performance is statistically weak and often perverse. the high volatility of individual markets does not matter. Emerging market companies that trade internationally may be dependent on growth in the developed world. even growth in market capitalizations may not provide returns to investors. acquisition. global investors are unable to share fully in these companies’ performance. global investors are often unable to share in emerging market returns. the GDP of these 29 markets has grown 4% per year faster than for developed markets. The credit crash. Risk and return Traditionally. the fact that emerging markets are projected to grow does not indicate that they will provide superior investment returns. there is no clear correspondence between a company’s nationality and its economic exposure. has led to a resurgence of the “future growth means higher returns” story.5% for the average developed market.

In the related Sourcebook. A beta of 1. Figure 6 shows that all correlations have risen sharply. This explains the recent upward jump. it is well known that correlations increase greatly during turbulence or following big downside moves. The light blue line shows that the average correlation between pairs of emerging markets has risen sharply from close to zero to 0. and in bearish months to underperform: their beta over the decade was 1. with a step jump upward over the most recent five-year period. In bullish months. However. most risk assets fall together. The upper panel shows the five worst months. this represents the top end of our expectations.55 today. knowledge of long-term capital market history should have warned them that precipitous declines are to be expected from time to time. for a global investor.55 remains a low correlation. Second. Diversification benefits Diversification benefits provide a strong motive for investing across both developed and emerging markets. namely that investors require higher returns for higher risk. This higher return arises not from the spurious growth argument.30.0 than historical estimates. but from a financial argument as old as time. rather than selecting just one or two. since during the credit crash. 1976–2009 Source: MSCI Barra. they remain sensitive to global markets. all risk assets fell together. Two factors are at work. 2000–2009 Source: Index returns in the most extreme months for the World index using data from MSCI While emerging markets sometimes decouple from developed economies. For longer term holders. 0. and that when they occur. the loss is quite small. however. emerging markets tend to outperform. and for the technical reason that future betas tend to be closer to 1. We should therefore expect a modestly higher return from emerging markets. First. the key metric is the red line showing the correlation between the emerging markets index and the MSCI World. this was a major issue. The benefits are greatest when correlations between markets are low. This aboveaverage beta is consistent with emerging markets’ poor relative performance during the tech-crash and credit crunch. Authors’ analysis 40% 30% 20% 10% 0% 1976–79 1980s 1990s 2000s Annualized return MSCI World index Average developed market 1976–79 1980s 1990s 2000s Annualized standard deviation Emerging markets index Average emerging market Figure 5 Returns in extreme months.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 _10 Figure 4 Emerging market risk and return. causing investors to complain that diversification had let them down just when they needed it most. as emerging markets are likely to mature and become more like developed markets.3 would imply a higher premium of approximately an extra 1½% per annum. í27% í20% í17% í12% í11% í11% í10% í9% í6% í15% 8% 9% 11% 14% 9% 9% 10% 12% í30% í20% í10% 17% 17% 0% 10% 20% MSCI EM MSCI World . Figure 6 shows how rolling five-year correlations have changed over time. The other lines in Figure 6 reveal a similar pattern. while the gray line shows the average across all pairs of emerging and developed markets. showing there are still huge benefits to holding diversified portfolios of emerging markets. and superior recoveries after the lows of March 2003 and March 2009. while the expectation of such episodes does lower the overall benefits of diversification. we argue that investors can expect an annualized long-run risk premium relative to cash of 3% 3½% from global equities. A higher beta implies a higher expected return. The dark blue line shows the average correlation between pairs of developed markets. Figure 5 examines months during 2000 09 in which the MSCI World boomed or collapsed. S&P. the five best. there has been a secular increase in globalization and growing interconnectedness between markets. But despite this rise. As a long-run estimate. However. and the lower panel. For investors who were forced sellers at the market lows of autumn 2008 or March 2009.

Nor would it be sensible to write off the prospects for developed markets. A small position in emerging markets will disproportionately reduce portfolio volatility. But even taken at face value. Furthermore. it is clearly no longer possible to assess developed market prospects without a deep understanding of the emerging world. The attractions of investing in emerging markets depend on an investor’s starting point. Emerging markets. but the gap has narrowed. the implications of their faster growth are already impounded in market valuations. On the assumption that emerging markets have not currently overreached themselves. 1976–2009 Source: The rolling 5-year correlations were computed by the authors using data from S&P and MSCI Barra . it is worth reallocating some of a portfolio to emerging markets. is different. Their longer term returns have been less stellar than many imagine. we estimate that. their expected outperformance will be closer to 1½% per annum and this reflects compensation for their higher risk. This can help to reduce overall portfolio risk when emerging markets are blended with a portfolio of developed market securities. they offer diversification benefits through exposure to different economies and sectors at different stages of growth. And while they have outperformed developed markets by 10% per annum over the last decade. it would be unwise to expect this to persist. Consider an equity investor whose holdings are entirely in developed markets. Meanwhile. They should remain the main focus of analytical effort.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 _11 This analysis therefore suggests that the most recent correlation estimates shown in Figure 6 almost certainly overstate prospective correlations over the next five years unless markets encounter a further shock of the same magnitude as the credit crash. Even if emerging equities offer the same expected return as developed equities. For example. The position of an investor located in an emerging market. whose holdings are entirely in that country’s market. the case for emerging markets is often oversold. Figure 6 Correlations between markets. a 1% reallocation to emerging equities will reduce portfolio volatility by more than 1%. Almost certainly. For this individual.91 between developed and emerging market indices still indicates scope for meaningful risk reduction from diversification between emerging and developed markets. despite the gloom surrounding their current state. At the same time. However. as will their weightings in world indices. the correlation of 0. Understanding the emerging world Emerging markets are now mainstream investments with a key role and essential position in global portfolios. over the long run. as global investment will remain weighted towards today’s developed markets for at least the next two decades. The reduced volatility of a global strategy is so appealing that it will be worth pursuing even if the expected return from foreign markets is lower. both individually and as an asset class remain riskier than developed markets. there is a potentially large benefit from reallocating assets to other worldwide markets. the importance of today’s emerging markets will continue to rise.

CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010_12 Photo: istockphoto/antoniodalbore .

2 . If we were clairvoyant. Looking at 83 countries over 110 years. Elroy Dimson. is economic growth a reliable predictor of future equity returns? Second. Switching from the higher growth markets in the top part of Table 1 to the more distressed economies shown in the lower part would today buy less than three-quarters of the holdings in “growth” markets that could have been purchased in March 2009. Last year also saw a two-speed world. or on those that are experiencing high economic growth? This is the old value-versus-growth dilemma.9 1.6 11.9 2.4 2.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 _13 Economic growth In 2009.8 0. stock markets rallied. First.5 4.8 1.4 2.7 6.4 13. Table 1 Real GDP growth and annualized equity returns Source: IMF.8 5.7 1.3 2.7 2.2 4. This was partly fueled by relief that financial Armageddon had been averted and partly by anticipation of a rapid return to growth.7 7.1 4.8 2.0 0. these market movements must have seemed deeply puzzling to the average citizen of the developed world. and China and Sri Lanka are from 1993) Jan–Dec 2009 Country China India Indonesia Sri Lanka Brazil France USA UK Germany Japan GDP % Return % 8. but on a global scale. Paul Marsh and Mike Staunton. especially China.9 6.9 3. The growth markets offer participation in expanding economies.7 5.0 5. They have decided to “follow the growth” because “higher growth means higher returns”.5 6. London Business School The past year saw a remarkable recovery in global equities with the MSCI world index rising 74% from its March low.7 7. Looking back.7 4. Switching in the other direction would today buy a 35% larger holding in the distressed economies than could have been bought in March 2009. where economies remained weakened and fragile. Emerging market equities greatly outpaced their developed counterparts. As so often happens. many high-growth economies have enjoyed high equity returns. (* In the final column. are equity markets a reliable predictor of future growth? To many investors the answer to the first question is selfevident.2 11. enjoyed robust growth. then the slow-growing markets will offer better value. we would favor equities in countries that are destined to prosper. but at a higher price. we find no evidence that investing in growth economies produced superior returns. S&P. this strategy is now more expensive to implement. If prices go too high. Should investors now focus on countries that still hope for recovery. we do find that stock markets incorporate predictions of future economic growth. while other economies still languished (see Table 1).9 7.9 1. However.0 2.0 3. DMS.8 9. However.5 1. When markets recover. stock prices have risen.8 1985–2009* GDP % Return % 9.8 0. However. and vice versa. real terms.3 68 72 96 111 67 28 25 28 24 9 2000–2009 GDP % Return % 9.5 4.1 0.8 4. while parts of the emerging world.9 1.2 1.8 2. All data is local currency. economies tend to follow. Indonesia is from 1990.1 8.4 1.3 6.6 4. annualized.7 9. just when growth looks more assured.9 2.2 0. These observations raise two key questions.

does a record of high growth indicate that stock returns will subsequently be high? Or by following such a strategy. but their national economies are growing fast. 1950–2050 Source: Data from World Bank and The World in 2050. stock market returns provide a useful indication of future growth in GDP per capita. PricewaterhouseCoopers 2008. and we need to interpret the impact of this for portfolio strategy. Value and growth investors have been grappling with these kinds of dilemmas for decades when they select stocks within equity markets. updates from John Hawksworth and Gordon Cookson. Each country is represented by a color. by the middle of this century. We are focusing here on the analogous problem of selecting between growth and value economies. do we end up overpaying for growth. Mexico. We draw on the Yearbook’s extensive database. The plan of our article is therefore as follows. while India will have overtaken the USA by 2050. the seven emerging markets of China. analyzing over 3. Currently. We start with a review of longer term trends in. China and India migrate from being a speck on the chart in the last century to being among the economies that are forecast. but they do signal a revolution in the global balance of economic power. these are simply projections. there is no clear relationship between changes in real GDP per capita and stock market performance. emerging markets repre- sent only 12% of global capitalization.000 country years of data to show that. We then address our first question. A recent PwC report compares the E7 with the G7 nations with projections to 2050. The changing economic landscape The stock markets of the G7 countries account for 71% of global equity market capitalization. authors’ analysis . Our second question is whether stock markets can predict economic growth. China is expected to overtake the USA in about a decade from now. have provided us with updated projections based on the latest available data. and the forecast waning of European countries. countries are ranked from the largest to the smallest GDP. Note the predicted ascent of China and India. We show that. In an analogy with the G7 nations. Should we then buy equities in countries that. there is no simple formula that can guide investment decisions. and for each year. As we noted in the previous article. The magnitude of the GDPs at each date is represented by the size of the bubbles. Figure 1 presents the past and projected GDP for selected countries. economic growth. Although the GDP of developed economies is expected to rise.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 _14 But we are not clairvoyant. Indonesia and Turkey are sometimes referred to as the E7. and over the short term. The authors. to be centers of economic wealth and growth. India. Brazil. have experienced economic growth? In other words. over the long haul. and projections of. We need to understand the implications of this for investment strategy. John Hawksworth and Gordon Cookson. The economic landscape is undergoing a transformation. prior to our purchase date. Figure 1 Developed and emerging market GDPs. These countries will become increasingly important to investors as their stock markets grow in value. which is whether economic growth is a reliable indicator of future equity returns. Russia. Economic growth patterns are changing the shape of our world and our investment universe. across countries and years. They conclude that the E7 economies will be more than 50% larger than the current G7 by 2050.

g. averaging just –0. which impacts on their GDP per capita. and so dividends ought to grow at a similar rate to the overall economy. dividends. we look next at the relationship over time between stock returns and GDP growth focusing on the US market. This controls for population growth thus providing a more direct measure of growth in prosperity.87) between real equity returns and real dividend growth across the 19 countries. The relationship may be further complicated by the fact that successful countries attract immigrants. Whatever the explanation. and South Africa (953%). Figure 2 Returns.30. Real dividend growth has lagged behind real GDP per capita growth in all but one country. To verify this. For example. While many European countries. when making long run economic growth comparisons. and the correlation between the two is –0. economic growth. However. Japan) investors’ expectations subsequently proved overly optimistic. such as the UK. and Ireland. Canada (524%). Staunton. There are many possible explanations for these findings. and the investors who own them. It shows that there is a high correlation (0. and hence higher stock returns. 1900–2009 Source: Dimson. but that in some cases (e. from lowest to highest. experienced modest (50%–60%) population growth between 1900 and 2009. depend on the state of both national economies and the global economy. Figure 2 ranks the real equity return of the 19 Yearbook countries over the period 1900–2009. Similarly. Figure 2 shows that the supposed association between long-run real growth in GDP per capita and real equity returns is simply not there (the correlation is –0. There is thus a gap between long-term economic growth and dividend and earnings growth. However. this finding should emphatically not be interpreted as evidence that economic growth is irrelevant. growth in GDP has two components: growth in per capita GDP and population increases. the 19 Yearbook countries had a positive correlation (0. corporate earnings will constitute a roughly constant share of national income.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 _15 Economic growth and stock-market performance The conventional view is that.41) between their 110-year real growth rate for overall GDP and their annualized real equity returns. the New World grew much faster. Rob Arnott and William Bernstein have pointed out that the growth of listed companies contributes only a part of a nation’s increase in GDP. In common with other researchers. The US population expanded by 308%. at any point in time.23). Consistent with this.1%. In entrepreneurial countries. He has also argued that markets anticipate economic growth. the claim that real dividends grow at the same rate as real GDP is clearly incorrect. This suggests that fast-growing economies will experience higher growth in real dividends. we therefore focus on changes in GDP per capita. over the long run. Marsh. rather than domestic. and GDP growth. But at the same time. The prosperity of companies. will clearly. It also helps explain why the relationship between GDP growth and stock returns is so noisy. Triumph of the Optimists. Jeremy Siegel has pointed out that the largest firms quoted on most national markets are multinationals whose profits depend on worldwide. New Zealand (423%). new private enterprises contribute to GDP growth but not to the dividends of public companies. Even more importantly. Belgium. authors’ updates Annualized real rate (%) 8 6 4 2 0 -2 -4 Ita Bel Ger Fra Spa Ire Jap Nor Swi Den Net Fin UK Can NZ US Swe SAf Aus Real equity return Real dividend growth Real GDP per capita growth . France. and the increase was even larger in Australia (479%). the absence of a clear-cut relationship between economic growth and stock returns should give investors pause for thought.

The regression relationship is statistically significant (the tstatistic is 3. Marsh. Finally. and are then extensively revised.29 –0. Dimson. We run regressions to predict annual GDP growth from equity returns for all 83 individual markets and for the world index for brevity. of quarters Adjusted R-squared (%) 250 5.4%). Staunton Stock returns and GDP growth over time Figure 3 shows the contemporaneous impact of quarterly GDP changes on the level of the US stock market. 1947–2009 Source: Quarterly data from US Bureau of Economic Analysis.22.61. This is because GDPs are not published until after the quarter. with revisions that are often of the same magnitude as the announced growth figure. we find no evidence of economic growth being a predictor of stock market performance. Pooling all observations in Figure 4. there is well over half a century of data. indicating that a 2. over the 2000s (in red) the correlation across 83 countries was 0.0%). Even over an interval of a decade. but realized GDP growth rates are no use for predicting quarterly market returns.14. For 20 different countries. for 78 there is more than a decade of data. Global Financial Data. The line of best fit (in blue) has a slope coefficient of 0. too.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 _16 Figure 3 US equity returns vs. The final figures plotted in Figure 3 would not have been known until several quarters later.91) (2. there was a correlation across 23 countries of 0. MSCI Barra. . GDP growth. each lasting a decade.5% increase in the GDP growth rate is associated with an equity return that is higher by one percentage point (0. Morningstar. Our second question is whether stock markets are informative about future growth.00 (3. Our world equity index has a 110-year history Figure 4 plots per capita real GDP growth against real equity returns over 183 investment periods.5%). DMS Annualized real equity return % 30 20 10 0 -10 -20 -6 -4 -2 0 2 Annualized GDP per capita growth % 2000s 1990s 1980s 1970s 4 6 8 10 To address our second question. A more formal analysis is presented in Table 2. In summary. Maddison. GDP data for the same quarter explains a useful proportion of this quarter’s equity return (i. We compile data on 83 national markets: the 19 Yearbook countries plus an additional 64 stock markets for which total returns (including dividends) are available.4 249 2. and for five the dataset spans just ten years. it has an R-squared of 5. this contemporaneous relationship cannot be used to predict investment returns. for 40 there is at least a quarter century of data. The R-squared of one percent (0. GDP data for the prior quarter explains something (2.90) and the adjusted R-squared is 5%. Dimson. 1970–2009 Source: S&P. Mitchell.e.0 Figure 4 Global equity returns vs.. Over the 1970s (in gray).72) (–0. the correlation across 44 countries was –0. we report only the latter and for a pooled sample of all markets (measured here in common currency. the association between economic growth and stock-market performance is tenuous. USD terms) commencing in both 1900 and 1950.12) between growth in per capita real GDP and real equity returns is statistically insignificant.33. Marsh. the low correlation (0.5% = 1.122) reveals that 99% of the variability of equity returns is associated with factors other than changes in GDP. To sum up. accurate predictions of GDP growth could be informative about stock market movements. In practice. Figure 4 extends our analysis to longer investment intervals and multiple markets.5 248 –0.41 0. Staunton Return during the quarter Slope coefficient (t-statistic) GDP growth in GDP growth in GDP growth 2 same quarter prior quarter quarters before 0. In the 1990s (in dark blue). GDP growth. During the 1980s (in light blue) there was a correlation across 33 countries of 0. Does the market predict economic growth? Real equity 30 return (%) 20 10 Change in real GDP (%) 0 -15 -10 -5 -10 0 5 10 15 20 -20 -30 Table 2 Regression of US returns on quarterly GDP growth Source: US Bureau of Economic analysis. But when regressing returns on the GDP change from two quarters earlier. we blend our single country perspective (Figure 3) with our longer-term international analysis (Figure 4).41 x 2.04) No.41. the model’s explanatory power drops to zero (see the last column).

the total return from buying stocks in the lowgrowth countries has equaled or exceeded the return from buying stocks in the high-growth economies.69 Table 6 Returns on markets ranked by future GDP growth Source: Dimson. Global Financial Data. All data in USD. the pooled regression shows that. two. To infer GDP expectations from equity returns in prior years.84.6 10. Maddison. All data in USD.10 –0. Table 3 reports regression coefficients for the world index and for a pooled dataset of all individual markets. The t-statistic is on average 1. of observations Adjusted R-squared (%) World index 1900–2009 † 0. Marsh and Staunton analysis using data from S&P. over the entire 110 years. is there a record of superior riskadjusted outperformance. Only in the post-1972 subsample (the rightmost column).8). Regressions of individual countries’ annual GDP growth on local-currency real returns.1 11.60 83 countries 1972–2009* 0. For each year. Mitchell.9 18.84 0. The coefficient on the return two years previously is closer to zero and.02 † 0.0 11. 99.6 13. For individual markets. Mitchell.00 3249 6 All markets 1950–2009* † 0. we calculate the US dollar return that would have been achieved by an equity investor who presciently buys each portfolio with foresight about next year’s GDP.1 83 countries 1972–2009* 25.73 0. non-significant.57 0. Morningstar. not significant at 95%) Independent variable measured in real USD Return 1 year before Return 2 years before No. USD) or in real local currency.9 27.g. We use these GDP quintiles to make portfolio decisions based solely on knowledge of past GDPs. Much of this outperformance may be attributed to the emerging markets.1 7.85 0. The world index reveals a relationship between GDP growth and equity return in the preceding year.61 0.0 13. For nearly all of the 83 countries. Maddison.53 0. There is no evidence of outperformance by high-growth economies.56 0. we therefore estimate regressions that employ prior-year market returns to predict GDP growth. MSCI Barra. MSCI Barra. Maddison. Global Financial Data.01 0. Global Financial Data.0 13. or five years. In Table 4.7 83 countries 1900–2009* 9.7 83 countries 1972–2009* 12. MSCI Barra. Marsh and Staunton analysis using data from S&P. Maddison. DMS.6 16. Mitchell. DMS. Consequently.4 Table 5 Sharpe ratios for markets ranked by past growth Source: Dimson. In Table 6. Morningstar. offer outstanding performance. with a highly significant t-statistic (2. we analyze portfolio performance based on historical GDP growth measured over a prior interval.9 . a perfect forecast of next year’s economic growth could be very valuable.9% significance level.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 _17 We have already noted that countries do not issue GDP statistics at the year-end. (* GDP data commencing as close as possible to 1900 or to 1972) GDP ranked by 1year future growth Lowest growth Lower growth Middling growth Higher growth Highest growth 19 countries 1900–2009 7. three.3 10.8 20. There has been greater variability from investing in economies with particularly high or low growth than from mid-ranked economies. (* GDP data commencing as close as possible to 1900 or to 1972) GDP ranked by 5year past growth Lowest growth Lower growth Middling growth Higher growth Highest growth 19 countries 1900–2009 10. Global Financial Data.47 0. as for the world. we assemble quintiles ranging from the lowest to the highest growth economies.1 18. Profits from prescience Buying growth markets fails to outperform because markets anticipate economic growth. Marsh and Staunton analysis using data from S&P.51 0. The market’s performance in the year before that is not significant. four. Mitchell. Historically.1 10.6 9.1 83 countries 1900–2009* 14. when stocks in low-growth economies subsequently performed well.1 10. Morningstar. DMS.06 108 6 All markets 1900–2009* † 0.55 83 countries 1900–2009* 0. Table 3 Regression of annual GDP growth on equity returns Source: Dimson.59 0. there is a highly significant relationship between GDP growth and the equity return in the previous year.5 9.5 9.9 9. (* GDP data commencing as close as possible to 1900 or to 1972) GDP ranked by 5year past growth Lowest growth Lower growth Middling growth Higher growth Highest growth 19 countries 1900–2009 0.7 15. the equity return over the prior year is positively related to subsequent GDP growth. DMS. All data in USD. and instead publish delayed estimates that are subject to revision. MSCI Barra. We find that there is no relationship between annual GDP growth rates and contemporaneous stock market returns.00 2337 30 Table 4 Returns on markets ranked by past GDP growth Source: Dimson. which is high considering how short many time series are.2 11. The results are robust to the length of holding period and to whether performance is measured in common currency (e. But if that is the case.7 10. Morningstar.52 0. All data in USD. indeed.57 0. This hypothetical strategy did. the Sharpe Ratio (the ratio of excess return on the portfolio to its annual standard deviation) is relatively similar across strategies.7 11. for the full 110-year period.8 11. The patterns of equity returns reported in these tables are similar whether economic growth is measured over an interval of one. have an adjusted Rsquared that is on average zero and in most cases negative. Local currency regressions for the 83 individual countries (not reported here) have an adjusted R-squared that averages 13%. Marsh and Staunton analysis using data from S&P. as can be seen in Table 5. † (* Regressions using country/year dummies.

compared to 7. A third explanation is that stock prices reflect projected cash flows and their riskiness. Investors have no choice but to extrapolate economic growth into the future. in a horse race between low-growth and high-growth economies.0% for the lowest-growth economies. most stock markets have rallied sharply and. investors cannot divine future growth. For all 83 countries over the period 1972 2009. there had to be a winner. Short-selling the stocks of fast-growing countries may be costly and risky. and bid up the prices of assets in growing economies to unrealistic levels. in the middle the corresponding quintile returns since 1900 for all 83 countries. behaviorally motivated. that strategy has failed to deliver superior performance. For example. but the outcome may simply be a matter of luck. explanation is that investors shun the equities of distressed countries. But historically. investors have historically earned the highest returns though with greater risk by adopting a policy of investing in countries that have shown recent economic weakness. divi- . for some countries.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 _18 On the left-hand side of Table 6. there is not a positive association between a country’s real growth in per capita GDP and the real returns from its stock market. What explains the disappointing returns from investing in high-growth economies? The simplest explanation is that. Even if this over-valuation of growth assets is apparent to sophisticated investors. we display the annualized returns for quintiles 1–5 of the 19 Yearbook countries. rather than investing in those countries that have grown most rapidly.7% annualized real return.9%. economic growth has been restored. Why has low growth beaten high growth? The recent economic downturn has been the deepest in many countries since the 1930s. compared to 12. however. A second. Over the long run. In reality. Accurate predictions of future economic growth would therefore be of great value. In recent decades. For the 19 Yearbook countries. and it is challenging to beat investors’ consensus growth predictions. When an economy grows. Many investors have reverted to the view that investing in fast-growing economies will generate superior equity returns. This is tricky because markets already anticipate future growth. it is hard to take advantage of it. and on the right-hand side the quintile returns since 1972 for the 83 countries. low-growth economies may have had resources that with hindsight were undervalued by investors.5% for next year’s lowest-growth economies. or they may have had a high probability of collapse. Yet from their low in early March 2009. They do not even know the growth rate for a year that has recently ended because national statistical offices require sometimes lengthy periods to finalize the year’s GDP. buying the equities of next year’s highest-growth economies would have generated an annualized real return of 27. whereas the outcome was survival by more of them than investors had anticipated. buying the equities of next year’s highest-growth economies would have generated an 11.

though their predictive power is limited. In other words. value investing has prevailed. too. Investors should ensure that their global portfolio is diversified across slow and fast-growing economies. subsequent equity returns should be expected to be lower. With a smaller equity risk premium. This does not mean that investors should avoid growth investing. Growth stocks – which have a share price that is high relative to fundamentals – have had inferior long-run returns. Within markets. Value stocks – which have low growth prospects and a low share price relative to fundamentals – have achieved superior long-run returns. . investors gain diversification benefits from holding a broad spread of securities in their portfolios. and should increase after economic decline. We find that investing in economies that have achieved high growth rates has failed to deliver better long-run investment returns. If future growth were known. Seeking value in international markets This article has revealed the consistency between strategies that have performed well within markets and those that have performed well across markets. That is what we find. does not act as a leading indicator of superior stock returns. In other words. Markets are a potentially useful leading indicator of future economic growth. is what we find. That. So stocks should appreciate. Within a single country’s stock market. partly because the forward-looking equity risk premium has become smaller. we should also find that stock prices are a predictor of future economic growth. The low-growth countries are making poor progress economically or are experiencing setbacks that may be overcome. The high-growth countries are expected to achieve speedy and sustained economic advancement. then investors should buy the stocks of these growing economies. however. if the market functions effectively.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 _19 dends are likely to rise and risk is reduced. At the same time. Internationally. Past economic growth. The same is true internationally. the stock market discounts anticipated economic conditions. if the market is effective. investors can choose between low-growth or high-growth countries. stock returns should decline after economic growth. and the equity risk premium shrinks.

CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010_20 Photo: istockphoto/Nikada .

a. And particularly extreme falls in corporate earnings were experienced from 1916 to 1921. Despite these huge overshoots. the front cover of "The Economist" sports the headline "Bubble Warning" and the subtitle "Why assets are overvalued. Equally. Today China’s share is back to its 1890 level. real equity returns were 2. four major oil shocks.” The hard part is to figure out what the expected cash flows are – especially since these cash flows may stretch out 30 years or more – and to apply a suitable discount rate. or about 13 years of trend performance ahead of themselves. And the most vocal pundits seldom admit that certainty about future cash flows. and especially perhaps when nominal or real bond yields are very low. Chief Global Strategist. What we can say in real time is more limited: namely that after certain episodes of rapid earnings growth and prosperity “expected future cash flows” can become dangerously unbounded. the swinging sixties. to the point of irrationality (for example. worse than in 1929. nearly a quarter of total US profits and about 30% of S&P 500 sales are generated abroad. over 6% p.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 _21 Value in the USA As recently as 1890. At the time of writing. small government and countless prophecies of decline. there is a natural human tendency to be over-pessimistic at market troughs and over-optimistic at market peaks." So here we examine what “persistence” and “overshooting” can tell us about the valuation debate and the case for (global) equities going forward. and vice versa. is not a human prerogative. profits and equity returns exhibit roughly linear growth for at least the last 100 years. (about 2% per annum for the first two.4 standard deviations below trend. So the US market is still far and away the biggest equity market in the world and strongly linked to emerging growth. for the latter). Given the size of the overshoots of earnings and returns.4 standard deviations above trend. some 19 years behind. real returns were 3. Even so. Cyclical fluctuations around these long trends can be very large. bubble valuations . the correct price of any asset is simply “the present value of all expected future cash flows from that asset. Credit Suisse Investment Banking Persistence and overshooting are the two most striking features of the long-run US data. protectionism. But productivity. each accounting for about 13% of world GDP. big government. Moreover. the broad US equity market still accounts for around 40% of world equity market capitalization – three times bigger than all emerging markets plus Hong Kong. Jonathon Wilmot. but rising rapidly. two world wars. but falling slowly. and even about the right discount rate to apply. Trend GDP growth has gradually declined from 3¾% per annum in the early 19th century to below 3% per annum more recently. At the peak of the tech bubble in March 2000. It is unlikely that the emerging world can prosper if the USA fails. three depressions. imperial overstretch in Vietnam. And this is where human psychology enters in. projecting corporate earnings or dividend growth to exceed nominal GDP growth more or less indefinitely). the core trends have survived among other things several major banking panics. nuclear competition with the Soviet Union. and in the banking panic of 2008/9. for example. while the US share is about 20%. the US and Chinese economies were about the same size. race riots. as population growth has slowed. Talk of American decline is back in fashion and claims that US equities are expensive after their dramatic post-crash rebound are common. At their extreme trough in 1932. A macro slant on valuation In theory.

That description seems to fit the evolution of the US economy rather well. this can mean knowledge. this can be thought of dividing how much it would cost to “buy” the existing private sector capital stock through the equity market by its estimated replacement cost. but Figure 4 compares the most widely cited version of Tobin’s Q for the US market with the log deviation of real equity returns from trend. unless and until they are at genuine extremes. The extreme overshoots are identified in the charts and tables. For individual firms. Either way. it is interesting to compare our real returns series with Tobin’s Q. Persistence and overshooting While this “persistence” is puzzling to many fundamental analysts. A possible explanation for this is that the common measures of Tobin’s Q will underestimate replacement cost when there is a significant element of “intangible capital” built into the share price. though simplistic. that even after rebounding some 70%. suggesting that it is seldom useful to base one’s investment strategy on valuation arguments. the long-term data can be used to help lean against this natural human tendency to feel what the crowd feels and to mistake cyclical overshoots for changes in the secular trend. unexploited patents or technology. that the historical pattern shows quite clearly how little time the market spends in the vicinity of its long-term trend. and so on. we used it in 1999/2000. producing negative returns even greater than the period from October 1929 to October 1938 (US equities also managed to clock up a dismal record for the worst decade ever). but hard for accountants to measure accurately. when the authorities managed to restore funding liquidity to the financial system and prevent a complete breakdown of the global banking and credit system. to suggest that the US market looked even more overvalued than in 1929.” what can be said now? First. US real equity returns between March 2000 and March 2009 were lower than in any previous 9-year period. but with a tendency for Tobin Q to trend up relative to the deviation of returns measure. Another possible line of defense for investors is to triangulate across different valuation measures. measured Tobin’s Q is more likely to exceed 1 in a knowledge-based economy in which intangible capital is increasingly important. and might lead one to expect a (steady) Figure 2 US real earnings per share (log levels) Source: Credit Suisse . The two measures move roughly in tandem. The first line of defense is to make the simplifying. Second. as shown in Figure 3. And third. For example. For the market as a whole. that the market appeared very but not outrageously “cheap” in February/March last year. Exactly opposite conclusions apply after major negative shocks or when real bond yields are unusually high. it could be extended to include the possibility of positive network effects or externalities from evolving technologies or innovation. This is also true for many other more recognized valuation measures.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 _22 Figure 1 US real GDP per capita Source: Credit Suisse might be the result of applying an implausibly low discount rate to quite sensible expectations of future cash flows. As with many other valuation measures there are some tricky measurement issues. This was of course not a popular message at the time. In the event. real returns are still slightly below trend: there is no sign from this metric that equities are in a bubble. Assuming “persistence. goodwill. however. Colloquially. assumption that the long-run trend in US real equity returns is indeed about 6% per annum. To us. at the peak of the tech bubble.

9% 12 yrs Reflation 9.9 í .1% 24 yrs Aftermath 2.a. if one allows for a “one-off” level shift in real earnings after World War I. or the inherent instability of the current capitalist system. and nowhere near the bubble extremes of 1999/2000.2% Standard Deviation = 33.7 í0. as Figures 1 and 2 show. At first sight.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 _23 Figure 3 US real equity returns Source: Credit Suisse 14 12 10 8 6 4 Panic .2. both earnings growth and productivity seem to have trended up at about 2% p.5% 13 yrs Inflation . one might expect any persistent trend in real earnings and dividend growth to be linked to trend growth in GDP per capita.1 í0.3 0.returns per annum) upward drift in its average value. Alternatively. for the past 100 years or more. For example.9% 0 1849 1869 1889 1909 1929 1949 1969 1989 US long-term real equity returns (log level index . But even if that were not true. Or even that the “risk-free” rate can no longer be regarded as risk free. Technology and future earnings growth Thinking about Tobin’s Q highlights the potential role of intangible assets and technological progress in driving future earnings growth.8% 14 yrs Secular Bull 13. but that may largely reflect the growing importance of technology companies on the one hand and efforts to return cash to shareholders in a more tax efficient way on the other.7. But the more fundamental point is that the persistence of productivity and earnings growth over a very long period suggests one should not lightly dismiss the idea that it will continue.3% 14 yrs 9 yrs Secular Bull 8. real equity returns deviation from trend Source: Credit Suisse 0.3 í0.5% 14 yrs Bubble Deflation 22.5 í0.3% 27 yrs Stagflation 2. or the fragility of globalization. because the probability of major sovereign defaults has gone up enormously after this crisis.6% 16 yrs After math Trend = 6. or global warming. So “rational pessimists” might argue that the equity markets are now overvalued because the ageing population.4% -1. one could question the market’s implied discount rate. one could worry that the very same factors cited above imply that we need a higher-than-usual risk premium. Only if it does not can we clearly say that equities are overvalued. Figure 4 USA: Tobin’s Q vs. estimated Tobin’s Q is currently around 1. that future output and productivity growth will in practice be (much) lower than long-term historical trends would suggest. or that current policies mean that the risk-free rate is unsustainably low. Dividends have grown a little more slowly than earnings per share. or a looming scarcity of essential resources make it almost certain. in their view. But.1 í0. Intuitively.3% 8 yrs Secular Bull 11. this does not appear to be true.

investors are unlikely to be using an inappropriately low risk-free rate in their present value calculations.8 10. so is the period from the mid-1990s to just before the failure of Lehman Brothers. Perhaps it is no coincidence that 1995 was precisely the moment when the technology sector exploded into life and productivity growth started to reaccelerate.8 25. optimism and pessimism are highly social and contagious phenomena: even highly intelligent and experienced investors tend to become excessively optimistic after a good run of growth. Moreover. historic periods of overvaluation or undervaluation are clearly visible. This is much more likely to be true in emerging Asia. Figure 6 also suggests that there have been “eras” of positive or negative sentiment towards equities: the 1940s and 1950s stand out as an era of low multiples.4 30.1 13.1 19. In summary. Siegel “What is an Asset Price Bubble? An Operational Definition. and excessively pessimistic after a crash.3 13. and so do the 1970s. even more obviously. 2003 1 .5 9.2 34.of years ahead trend) 8. the long-term trend in US real earn- Table 1 Secular undershoots Source: Credit Suisse Year 1857 1932 1938 1942 1974 1982 2009 Trough in real equity returns (no. Moreover. wealth creation and prosperity. 1942 and 1982) are defined by trend multiples of six to seven times.9 8. and longer-dated forward yields (both nominal and real) are both considerably higher than rates are today and in line with longer-term growth rates of the economy (the UK index-linked market is a notable exception here).8 Multiple of trend earnings at peak 19.1 Table 2 Secular overshoots Source: Credit Suisse Year 1881 1906 1929 1968 1998 2000 2007 Trough in real equity returns (no. of years behind trend) 13.5 8.3 39.1 10.2 7.5 29. First. Once again. where structurally high growth rates are combined with structurally low interest rates.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 _24 Figure 5 US real equity returns deviations from trend Source: Credit Suisse Optimism and pessimism All of these points are arguable – indeed several books could be written on each one of them. 1974 and 2009?) are defined by multiples in the 10–13 range. Extreme overvaluation is defined by multiples of 30–40 times trend earnings (1929.0 6.9 11. therefore. we know from the simpler versions of the dividend discount model that the value of an individual equity or of a stock market goes up exponentially as the discount rate and expected future growth rate of cash flows start to converge.4 4.2 10. US market trading at a plausible multiple By contrast. The 1960s are a period of optimism and.5 Multiple of trend earnings at trough 5.8 9. For the most part. Periods of extreme cheapness (1932. the current multiple is within the middle range – albeit at the top end – of historical experience. much of the current obsession with bubbles is policy related."1 Second. But most developed-world yield curves are steep. as Jeremy Siegel has noted: "A history of the market suggests that there is far more “irrational despondency” at market bottoms than “irrational exuberance” at market peaks. If anything.6 20. Third.7 11. But here we confine ourselves to three observations.2 Jeremy J.8 9. 2000 and arguably 2007). and directly relates to the fear that ultra-low interest rates will foster another bubble if left in place too long. we would draw five conclusions from the patterns reviewed here.” European Financial Management. Other major troughs (1938.8 13. First. emerging equities are probably more bubble prone than developed markets right now. a simple regression relating real government or corporate bond yields to the “trend P/E” ratio shown in our last chart indicates that the US market is trading at a plausible multiple at the moment.

trend multiples could get stuck in an abnormally “pessimistic” range of 7 13 times. and nowhere near bubble territory. as we saw in 2008/09.” they are indeed overvalued. But free trade and free capital flows did not in fact survive the replacement of the UK by the USA as the world’s leading economic power. once you allow for a one-off level shift in real earnings just after World War I. but the only sustainable way for them to grow will be via domestic demand that ultimately expands the global market for US and other developed country exports. this might actually mean that the US market was genuinely cheap for those few longer-term investors who had the courage and spare cash to increase equity weightings! Fourth. its importance to emerging country exports and the risk of protectionism in a bad scenario. The next decade for US equities The overriding common interest of China. History warns that this could happen again. Logically enough. but. for the rise of China.” However. this translates to 400 800 for the S&P 500 over the next few years. if you believe that America will likely renew itself yet again and deliver trend productivity growth of 2% p.a. like the USA in the 19th century. Taxation and a change in industry mix may partly account for the fact the dividend payout ratio has trended down since 1940 or so. When people assert that the market is overvalued. rather the opposite. Or. then the next decade for US equities is likely to be a bright one. Their growth may. be punctuated by some big upheavals. Third. . looking forward. India. Indeed. Equally. given the size of the American market. even if past productivity trends did in fact persist. GDP and equity returns. in our view.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 _25 Figure 6 US equity market P/E based on trend earnings Source: Credit Suisse 40 35 30 25 Current trend earnings: USD 59 (nominal) USD 52 (real) High 20.1 Low Current = 20. Fundamentally. climate change and the rebalancing of global demand. Perversely. Once again. in the future then US equities are arguably closer to “fair value” than normal. this is just another way of saying that it is macro factors rather than micro ones that are most germane to the valuation debate. Fifth. if you do not believe in “persistence. they are really expressing their skepticism about the future of US productivity growth and/or the future of globalization.1 13. The real question is whether the current extreme shock to earnings will cause another “permanent” downshift in the level of trend earnings. for both political and economic reasons it is almost certainly impossible for a set of countries this big to become prosperous mostly by taking export market share from other (richer) countries. past and expected future productivity growth may indeed help narrow the range of plausible estimates for “trend” earnings and dividend growth – and by extension for cyclically adjusted or “trend” P/E. to put it differently. but not quite in the sense that most analysts mean. Meaningful decoupling from disaster might just work in 20 years time. it is more likely that real dividends and earnings will grow in line. Second. not a microeconomic debate about valuation. Indeed. Russia and the developed world is to find technological and political solutions to the challenges of energy security. and this directly contributed to the Great Depression and huge undershoot in global equity returns of the 1930s. despite a strong common interest in “mutually assured prosperity. investing in emerging equities would likely provide no hedge against a steep drop in US consumption. this leads us to a complex macro judgment. this is more of a macro question than a micro one. the reverse is also true: if you believe in the potential benefits of accelerating technological change and the dramatic rise of the emerging world. In round numbers. but not today when emerging world consumption is still only 20% of the global total. if bad policy or sheer bad luck soon leads to a severe relapse into debt deflation followed perhaps by protectionism and capital controls – it is quite plausible to believe that the equity risk premium will get stuck in an abnormally high range for many years. India and the other big emerging countries to be sustainable it cannot in the end be a zero sum game.2 20 Medium 15 10 5 7.0 0 Jan 1871 Jan 1886 Jan-1901 Jan-1916 Jan-1931 Jan-1946 Jan-1961 Jan-1976 Jan-1991 Jan-2006 ings growth has been remarkably close to the long-term trend in productivity growth. Hence.

CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010_26 Photo: istockphoto/dblighte .

The underlying data are available through Morningstar Inc. Extensive additional information is available in the Credit Suisse Global Investment Returns Sourcebook 2010. Credit Suisse Global Investment Returns Sourcebook 4. there are three charts for each country or region. This 200-page reference book is available through London Business School (see the inside back cover for contact details). and the UK). and full 110 years. Figure 1 shows the relative sizes of world equity markets at our base date of end-1899. The countries comprise two North American nations (Canada and the USA). All equity indexes are weighted by market capitalization (or. Staunton. and one African market (South Africa). all with index series that start in 1900. Marsh and M. Dimson. eight euro-currency area states (Belgium. Finland. and an analogous 13-country European equity index. Ireland. The worldwide equity premium: a smaller puzzle. end-2009 Japan 7. bonds.7% France 4.3% USA 19. and standard deviation of real returns for equities.. and New Zealand). These countries covered 89% of global stock market capitalization in 1900 and 85% by the start of 2010. and currencies for 19 countries from 1900 to 2009. bonds.. Paul Marsh and Mike Staunton. 2010. The upper chart reports. The latter are a 19country world equity index denominated in USD.0% Russia 3.6% Australia 3.2% Other 15. Figure 1 Individual markets The Credit Suisse Global Investment Returns Yearbook has been expanded to cover 22 countries and regions. The country pages provide data for 19 countries. half-century. Staunton.5% UK 30.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 Country profiles_27 Guide to the country profiles The Yearbook’s global coverage The Yearbook contains annual returns on stocks. P. Dimson. Relative sizes of world stock markets.9% UK 8. Norway. E. Amsterdam: Elsevier 3.4% Source: Elroy Dimson. In the country pages that follow.1% Figure 2 Relative sizes of world stock markets. Markets that are not included in the Yearbook dataset are colored in black.6% Other Yearbook 5.3% USA 41. P. the Yearbook covered 89% of the world equity market in 1900 and 85% by end-2009. P. 2008. Staunton.. R.6% Other 3. all with income reinvested. E. Marsh and M. Germany. Dimson. Dimson.1% Spain 2.8% Austria-Hungary 3. nominal returns. with countries weighted by GDP. R. R Mehra (Ed.7% Canada 3. the Netherlands. R. listed alphabetically starting on the next page. Marsh and M. Figure 2 shows how they had changed by end-2009. The bottom chart compares the 110-year annualized real returns.3% Germany 6. Italy. the real value of an initial investment in equities. five European markets that are outside the euro area (Denmark. Japan. an analogous 18-country world ex-US equity index. and followed by three broad regional groupings.9% Belgium 3. Sweden. by GDP).5% Germany 3. measured over the last decade.9% Japan 4. (the “DMS” data module) . E. and Treasury bills.1% Italy 1. quarter-century. The middle chart reports the annualized premium achieved by equities relative to bonds and to bills.. Credit Suisse Global Investment Returns Sourcebook 2010 Bibliography and data sources 1.8% Netherlands 1. 2010. As these pie charts show. in years before capitalizations were available.0% Switzerland 3.6% Italy 1.5% Canada 1. Morningstar Inc. and Spain). for the last 110 years. E. We also compute bond indexes for the world. Marsh and M. The Dimson-MarshStaunton Global Investment Returns Database.) The Handbook of the Equity Risk Premium. end-1899 France 14. and bills. long-term government bonds. NJ: Princeton University Press 2. Two countries appear for the first time in the 2010 Yearbook: Finland and New Zealand. P. France.6% Other Yearbook 5. three Asia-Pacific countries (Australia. Triumph of the Optimists. world ex-US and Europe. R. Staunton. inflation. Switzerland. 2002. bills.

8% per year.9 1. Australia has been the best performing equity market over the 110 years since1900. Australia Figure 1 Annualized performance from 1900 to 2009 The lucky country Australia is often described as “the Lucky Country” with reference to its natural resources.4 6.5 1.4 0.0% and bills by 6.2 13. and distance from problems elsewhere in the world. equities beat bonds by 6.) Premium vs Bills (% p.8 -5 -10 2000-2009 1985-2009 1960-2009 1900-2009 Premium vs Bonds (% p. prosperity.) Figure 3 Returns and risk of major asset classes since 1900 25 20 15 10 5 0 -5 Real return (%) Equities Nominal return (%) Bonds Bills Standard deviation 7. The Australian Securities Exchange (ASX) has its origins in six separate exchanges. Australia also has a significant government and corporate bond market. see page 27. since 1900. Figure 2 shows that.5% as compared to bonds and bills. while the largest stocks are BHP Billiton. 10. weather. For additional explanations of these figures.a.4% and 0. Figure 3 shows that the long-term real return on Australian equities was an annualized 7.1 3.a.000 2.3 4.7 18.9 4. grew by a factor of 2844. established as early as 1861 in Melbourne and 1871 in Sydney.1 Equities Bonds Bills Figure 2 Equity risk premium over 10 to 110 years 10 5 3. which gave a real return of 1. with a real return of 7. Westpac and Commonwealth Bank of Australia. over the last 110 years. Credit Suisse Global Investment Returns Sourcebook 2010 .6 5.844 1. and is home to the largest financial futures and options exchange in the AsiaPacific region. the real value of equities. Paul Marsh and Mike Staunton. Its principal sectors are banks (28%) and mining (20%). This luck has extended to equity investors. The ASX is now the world’s eighth-largest stock exchange. It has the world’s seventh-largest forex market and the Australian dollar is the world’s sixth most heavily traded currency. More than 50% of Australia’s adult population own shares in publicly listed companies.0 6.5% per year.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 Country profiles_28 Capital market returns for Australia Figure 1 shows that.000 100 10 1 0 1900 10 20 30 40 50 60 70 80 90 2000 10 4.7 for bonds and 2.7% respectively.1 for bills.4 11.2 0 1.1 as compared to 4.7 2. with income reinvested. Sydney is a major global financial center.5 3.7 5.3 Source: Elroy Dimson. well before the federation of the Australian colonies to form the Commonwealth of Australia in 1901.

) Premium vs Bills (% p.7 3.2 5.6% and bills by 2.0 5. making it a major battleground in two world wars. Belgium’s strategic location has been a mixed blessing.5 -0. since 1900. with income reinvested. Brussels rapidly grew into a major financial center. Figure 2 shows that.3 8. the real value of equities.6 0 -2. 100 16 10 1 0.7 for bills.9 0.3%. Paul Marsh and Mike Staunton.) Figure 3 Returns and risk of major asset classes since 1900 25 23.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 Country profiles_29 Capital market returns for Belgium Figure 1 shows that. Fortis. In 2010.1 -0. It suffered badly during the recent banking crisis. The ravages of war and attendant high inflation rates are an important contributory factor to its poor long-run investment returns – Belgium has been one of the two worst-performing equity markets and the sixth worst performing bond market.0 8.0 12. Its importance has gradually declined. but they now comprise around one-tenth of the index.0 2.6 2.6 compared to 0.9 1. grew by a factor of 15.7 20 15 10 5 0 -5 Real return (%) Equities Nominal return (%) Bonds Bills Standard deviation 2.7 0 1900 10 20 30 40 50 60 70 80 90 2000 10 Equities Bonds Bills Figure 2 Equity risk premium over 10 to 110 years 10 5 0. but Belgium can also assert centrality. Credit Suisse Global Investment Returns Sourcebook 2010 . Figure 3 shows that the long-term real return on Belgium equities was an annualized 2.9 -5 -5. respectively.8 1.5% compared to bonds and bills. The Brussels stock exchange was established in 1801 under French Napoleonic rule.a. For additional explanations of these figures. The three largest stocks at end-2009 were Anheuser-Busch. and is the headquarters of the European Union.9 for bonds and 0.1 Source: Elroy Dimson. equities beat bonds by 2.6 -10 2000-2009 1985-2009 1960-2009 1900-2009 Premium vs Bonds (% p.9% per year. specializing during the early 20th century in tramways and urban transport. over the last 110 years. and Euronext Brussels now ranks 26th among world exchanges by size. see page 27. which gave a real return of –0. Belgium Figure 1 Annualized performance from 1900 to 2009 At the heart of Europe Lithuania claims to lie at the geographical heart of Europe. Three large banks made up over half its market capitalization at start-2008.a. Belgium was ranked the most globalized of the 181 countries that are evaluated by the KOF Index of Globalization.1% and –0. It lies at the crossroads of Europe’s economic backbone and its key transport and trade corridors. and KBC.

1 for bonds and 5. Given Canada’s natural endowment.6%. grew by a factor of 479.) Premium vs Bills (% p. and its economy is the tenth-largest.0% per year.5 -10 2000-2009 1985-2009 1960-2009 1900-2009 Premium vs Bonds (% p. gold. Canadian equities have performed well over the long run.1 5.8 for bills.9 3.000 479 100 10 9.1 4. Figure 3 shows that the long-term real return on Canadian equities was an annualized 5. it is no surprise that oil and gas and mining stocks have a 35% weighting in its equity market. The real return on bonds has been 2.0 -5 -0. with income reinvested.7 10. especially grains and wheat. For additional explanations of these figures. It is also a major exporter of soft commodities.1 1. 1.6 5. Toronto-Dominion Bank and Suncor Energy. It is blessed with natural resources. while a further 26% is accounted for by financials.) Figure 3 Returns and risk of major asset classes since 1900 25 20 15 10 5 0 -5 Real return (%) Equities Nominal return (%) Bonds Bills Standard deviation 9.8 3. The Canadian equity market dates back to the opening of the Toronto Stock Exchange in 1861 and is the world’s fifth-largest.8 1 0 1900 10 20 30 40 50 60 70 80 90 2000 10 Equities Bonds Bills Figure 2 Equity risk premium over 10 to 110 years 10 5 2. Canada Figure 1 Annualized performance from 1900 to 2009 Resourceful country Canada is the world’s second-largest country by land mass (after Russia).8% compared to bonds and bills.5 compared to 9.a. equities beat bonds by 3. respectively.8% per year.7% and bills by 4. pulp and paper.a. as well as lumber.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 Country profiles_30 Capital market returns for Canada Figure 1 shows that. uranium and lead.0 5.9 17. The largest stocks are currently Royal Bank of Canada.6% of world capitalization. Paul Marsh and Mike Staunton. accounting for 3.2 2.4 0 -2.8 2.0% and 1. while its mines are leading producers of nickel. These figures are remarkably close to those for the United States. which gave a real return of 2.0 1. since 1900. over the last 110 years.3 Source: Elroy Dimson. having the world’s second-largest oil reserves. Credit Suisse Global Investment Returns Sourcebook 2010 . Figure 2 shows that.1% per year.7 4. diamonds. with a real return of 5.4 4. the real value of equities. see page 27.

it does not appear to spring from outstanding equity returns.000 192 100 25. who felt it was more appropriate to use mortgage bonds. Danske Banking. while respectable. Danish bonds gave an annualized real return of 3.9 compared to 25. Figure 3 shows that the long-term real return on Danish equities was an annualized 4.9 2.2 0 -0. which gave a real return of 3.) Premium vs Bills (% p. Figure 2 shows that.6 for bonds and 12.7 20. Paul Marsh and Mike Staunton. rather than more thinly traded government bonds.5% per year.8 -10 2000-2009 1985-2009 1960-2009 1900-2009 Premium vs Bonds (% p.a.3%.0 7. unlike those for the other 18 countries. Denmark Figure 1 Annualized performance from 1900 to 2009 Happiest nation In a recent global survey of citizens’ happiness.1 11.0% and 2. ranked “least happy. Danish equities have given an annualized real return of 4. The returns are taken from a study by Claus Parum. Denmark was ranked “happiest place on earth. The country with the highest returns for truly default-free bonds is Sweden.0 for bills. This is because our Danish bond returns.0 1 0 1900 10 20 30 40 50 60 70 80 90 2000 10 Equities Bonds Bills Figure 2 Equity risk premium over 10 to 110 years 10 5 2. The Copenhagen Stock Exchange was formally established in 1808. ranking as the world’s 25th largest.9 0 -5 Real return (%) Equities Nominal return (%) Bonds Bills Standard deviation 3. the highest among the Yearbook countries. understandably. respectively.6 10 12.3 9.” closely followed by Switzerland and Austria. and Vestas Wind Systems.1 -5 -0.4%. the real value of equities. grew by a factor of 191.) Figure 3 Returns and risk of major asset classes since 1900 25 20 15 10 5 4.8% and bills by 2. include an element of credit risk. with Zimbabwe.2 0.5 1.a. is below the world return of 5. For additional explanations of these figures.0 6.9% compared to bonds and bills. Credit Suisse Global Investment Returns Sourcebook 2010 .8 Source: Elroy Dimson.3 6.0 2.” Whatever the source of Danish happiness.9%. with income reinvested. 1. The Danish equity market is relatively small. but can trace its roots back to the late 17th century. It has a high weighting in healthcare (42%) and industrials (19%).8 2.1 3. and the largest stocks listed in Copenhagen are NovoNordisk. see page 27.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 Country profiles_31 Capital market returns for Denmark Figure 1 shows that. which. since 1900. equities beat bonds by 1.0%. Since 1900. In contrast. over the last 110 years.

1 0 -0.4% and bills by 5.9 Source: Elroy Dimson.6 0 1900 10 20 30 40 50 60 70 80 90 2000 10 Equities Bonds Bills Figure 2 Equity risk premium over 10 to 110 years 10 5 3.7 for bonds and 0. The OECD ranks Finnish schooling as the best in the world.9 13. over the last 110 years.4 5.4 -5 Real return (%) Equities Nominal return (%) Bonds Bills Standard deviation 12.3% and –0. and trading began at the Helsinki Stock Exchange in 1912. In 1917. see page 27.1 4. which damaged Finland’s stockmarket performance. which gave a real return of –0.1 6. For additional explanations of these figures. with income reinvested.a. the Helsinki exchange has been part of the OMX family of Nordic markets. Finland is the only Nordic state in the euro currency area. Paul Marsh and Mike Staunton. Since 2003. an important export earner. the world’s largest manufacturer of mobile telephones. Nokia’s value fell during 2009 by 20%.6% per year.4 25 20 15 10 5 5. and Finland is a highly concentrated market.a. The Finns have transformed their country from a farm and forest-based community to a diversified industrial economy operating on free-market principles. 1.9 7.3 -0. equities beat bonds by 5. This country of snow.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 Country profiles_32 Capital market returns for Finland Figure 1 shows that. It is home to Nokia. At its peak.) Figure 3 Returns and risk of major asset classes since 1900 30. Forestry. swamps and forests – one of Europe’s most sparsely populated nations – was part of the Kingdom of Sweden until sovereignty transferred in 1809 to the Russian Empire.6 5.000 251 100 10 1 0.8 11.7 0.6 for bills. Credit Suisse Global Investment Returns Sourcebook 2010 . Per capita income is among the highest in Western Europe. Sampo.1% as compared to bonds and bills. Figure 2 shows that.6 as compared to 0. Finland became an independent country. the real value of equities. Finnish securities were initially traded over-the-counter or overseas. Finland is a meeting place for Eastern and Western European cultures. Finland Figure 1 Annualized performance from 1900 to 2009 East meets West With its proximity to the Baltic and Russia. The largest Finnish companies are currently Nokia.5 4. A member of the EU since 1995.6 -5 -7.7 0 5. and Fortum.2 -10 2000-2009 1985-2009 1960-2009 1900-2009 Premium vs Bonds (% p. provides a secondary occupation for the rural population.) Premium vs Bills (% p. grew by a factor of 250. since 1900. Finland excels in high-tech exports. which is rated the most valuable global brand outside the USA.6 -10.4% respectively. Nokia represented 72% of the value-weighted HEX All Shares Index. Figure 3 shows that the long-term real return on Finnish equities was an annualized 5.

the real value of equities. Figure 2 shows that.3% and bills by 6.2 -2.8 for bonds and 0.2 -5 -6. being a founder member of the European Union and the euro. which gave a real return of –0.8 compared to 0.) Premium vs Bills (% p.1% per year.2 9.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 Country profiles_33 Capital market returns for France Figure 1 shows that.1 -0. France is Europe’s second-largest economy and the fifth-largest in the world.8 0.1 -10 2000-2009 1985-2009 1960-2009 1900-2009 Premium vs Bonds (% p. since 1900. But Paris remained important. the economic historian put it. ranked fourth in the world.2% and –2.0 4.1 0.8%.04 for bills. especially.01 1900 10 20 30 40 50 60 70 80 90 2000 10 Equities Bonds Bills Figure 2 Equity risk premium over 10 to 110 years 10 5 5.6 20 15 10 5 3. It has Europe’s second largest equity market. As Kindelberger. with income reinvested.” Paris has continued to be an important financial center while France has remained at the center of Europe. respectively. France Figure 1 Annualized performance from 1900 to 2009 European center Paris and London competed vigorously as financial centers in the 19th century.5 1. see page 27.) Figure 3 Returns and risk of major asset classes since 1900 25 23. France ranks 16th out of the 19 Yearbook countries for equity performance. grew by a factor of 27. equities beat bonds by 3. Paul Marsh and Mike Staunton. It has had the third-highest inflation. over the last 110 years.3 6. Figure 3 shows that the long-term real return on French equities was an annualized 3.a.04 0. the inflationary episodes and poor performance date back to the first half of the 20th century and are linked to the world wars. After the Franco-Prussian War in 1870. hence the poor fixed income returns. For additional explanations of these figures.1 0 -5 Real return (%) Equities Nominal return (%) Bonds Bills Standard deviation -0. including the Ottoman Empire. Paris was a European financial center.6 7.9 3. However.1 10. “London was a world financial center.6 0 -3. 100 28 10 1 0.1% compared to bonds and bills. Credit Suisse Global Investment Returns Sourcebook 2010 . London achieved domination.8 13. 15th for bonds and 18th for bills.2 3. Since 1950. Long-run French asset returns have been disappointing.6 Source: Elroy Dimson.a. It has the fourth-largest domestic bond market in the world. French equities have achieved mid-ranking returns. in loans to Russia and the Mediterranean region. to its later disadvantage.

0 0 -5 Real return (%) Equities Nominal return (%) Bonds Bills Standard deviation -2. The largest stocks are Siemens and E. Credit Suisse Global Investment Returns Sourcebook 2010 .7 2.8 -10 2000-2009 1985-2009 1960-2009 1900-2009 Premium vs Bonds (% p. Paul Marsh and Mike Staunton. while it has the fifth-largest domestic bond market in the world. For additional explanations of these figures.0 -5 -6. while bonds fell by 91%. Its stock market. equities fell by 88% in real terms. see page 27.) Figure 3 Returns and risk of major asset classes since 1900 32. 17% in industrials. equities beat bonds by 5.4 25 20 15 10 5 3.2 0. with income reinvested.a.7%).4 2.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 Country profiles_34 Capital market returns for Germany Figure 1 shows that.9 3.094% in real terms from 1949 to 1959.11 0. There was then a remarkable transformation. the real value of equities. Germany Figure 1 Annualized performance from 1900 to 2009 Locomotive of Europe German capital market history changed radically after World War II. which gave a real return of –2. respectively.8% per year. and the second best-performing bond market. which dates back to 1685.) Premium vs Bills (% p.2 as compared to 0. its strongest currency (now the euro).0% as compared to bonds and bills. In the early stages of its “economic miracle. From 1949 to date. Germany is Europe’s largest economy. In World War II and its immediate aftermath. and is now ranked second biggest exporter in the world. 100 25 10 1 0. inflation hit 209 billion percent.0 -2. it built a reputation for fiscal and monetary prudence.4 8.07 0. over the last 110 years.a.3 Source: Elroy Dimson. Figure 2 shows that. and holders of fixed income securities were wiped out. It lost its position as the world’s top exporter to China.4%. ranks seventh in the world by size.11 for bonds and 0. since 1900. The German stock market retains its bias towards manufacturing. Germany rapidly became known as the “locomotive of Europe.3 2. it has enjoyed the world’s lowest inflation rate. In the hyperinflation of 1922–23.07 for bills.6 13.0% and –2. 18% in basic materials.3 15.1 0 0.0 0 -4.” German equities rose by 4.4% and bills by 5.5 5. with weightings of 15% in consumer goods.ON. In the first half of the 20th century. 1922–23 is included only for real equity return.” Meanwhile.01 0 1900 10 20 30 40 50 60 70 80 90 2000 10 Equities Bonds Bills Figure 2 Equity risk premium over 10 to 110 years 10 5 1. grew by a factor of 25. Figure 3 shows that the long-term real return on German equities was an annualized 3. and 14% in utilities (15. German equities lost two-thirds of their value in World War I.4 5.

financials and gearing.1 0. the secondrichest in the EU.8 0 -5 Real return (%) Equities Nominal return (%) Bonds Bills Standard deviation 1.5 4. and Irish stocks fell 75% in real terms in 2007–08.7%. For additional explanations of these figures. However. which gave a real return of 1.0 0 3. At the end of 2006. by 2010 they represented just 10% of the market.8% compared to bonds and bills. equities beat bonds by 2.2 1 0 1900 10 20 30 40 50 60 70 80 90 2000 10 Equities Bonds Bills Figure 2 Equity risk premium over 10 to 110 years 10 5 3.9 2000-2009 1985-2009 1960-2009 1900-2009 Premium vs Bonds (% p. grew by a factor of 60.1% and 0. The 1990s saw the beginning of unprecedented economic success. Too much of the market boom was based on real estate.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 Country profiles_35 Capital market returns for Ireland Figure 1 shows that. Ireland experienced large-scale emigration.2 Source: Elroy Dimson. we constructed an index for Ireland based on stocks traded on these two exchanges. Credit Suisse Global Investment Returns Sourcebook 2010 . Ireland had the secondhighest real equity return of any Yearbook country. the real value of equities. but these fell by 95% during 2007–08. so in order to monitor Irish stocks from 1900 (22 years before independence).7 8. it has shrunk since 2006. Over the period 1987–2006. and from 1987 the economy improved. Figure 3 shows that the long-term real return on Irish equities was an annualized 3.0 6.) Premium vs Bills (% p.4 2.) Figure 3 Returns and risk of major asset classes since 1900 25 20 15 14. the Irish market had a 57% weighting in financials. Paul Marsh and Mike Staunton.7 23.5 5.a.5 2. since 1900. Ireland Figure 1 Annualized performance from 1900 to 2009 Celtic Tiger Ireland gained its independence from the United Kingdom in 1922. and Ireland became known as the Celtic Tiger. By 2007. During the 1950s.7 10 5 3. stock exchanges had existed in Dublin and Cork since 1793. Figure 2 shows that.2 -10 -5.5 for bonds and 2. In the period following independence.1 -5 -8. over the last 110 years. 1. nor equity returns were especially strong. neither economic growth. Ireland is one of the smallest markets covered by the Yearbook. respectively.6% and bills by 3. It joined the European Union in 1973. The tiger now has a smaller bite.000 100 61 10 3.6 compared to 3.6 3.1% per year.a. with income reinvested.7 0. see page 27.2 for bills. and was experiencing net immigration.2 5. it had become the world’s fifthrichest country in terms of GDP per capita. and sadly.

Generali Assicurazio and Unicredito. Since 1900. banking takes its name from the Italian word “banca. with financials accounting for 43% of the Italian equity market. respectively.1%. which gave a real return of –1.2 0. including the Medici. Credit Suisse Global Investment Returns Sourcebook 2010 .6 -3. over the last 110 years.02 10 20 30 40 50 60 70 80 90 2000 10 1900 Equities Bonds Bills Figure 2 Equity risk premium over 10 to 110 years 10 5 3. with income reinvested. see page 27.6% and –3. Indeed. Paul Marsh and Mike Staunton.9 -10 2000-2009 1985-2009 1960-2009 1900-2009 Premium vs Bonds (% p. the annualized real return from equities has been 2.1 0 0. For additional explanations of these figures.5 compared to 0. Apart from Germany. since 1900. and the highest inflation rate and weakest currency.1% compared to bonds and bills. the real value of equities. These bankers were known as Lombards.2 for bonds and 0.8 6.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 Country profiles_36 Capital market returns for Italy Figure 1 shows that.) Premium vs Bills (% p. Italy has experienced the second-worst real bond and worst bill returns of any Yearbook country (see Figure 1 opposite). Sadly.a.1 10.9 3.3 -1. Today.5 0.6 Source: Elroy Dimson. Figure 3 shows that the long-term real return on Italian equities was an annualized 2. 100 10 9 1 0." the bench on which the Lombards used to sit to transact their business.1 -1.6 -5 -7. while its highly developed domestic bond market is the world’s thirdlargest.2 -1. and the largest stocks traded on the Milan Stock Exchange are Eni.01 0 0. dominated lending and trade financing throughout Europe in the Middle Ages.8% and bills by 5.8 5.a. Italy has experienced some of the poorest asset returns of any Yearbook country. the lowest return out of 19 countries. Italy retains a large banking sector to this day. Figure 2 shows that.) Figure 3 Returns and risk of major asset classes since 1900 29.5 11.9% per year.7 4. North Italian bankers. Its equity market is the world’s 13th largest.7%. Oil and gas accounts for a further 20%.7 14.5 0 -4. equities beat bonds by 3.02 for bills. a name that was then synonymous with Italians. Italy can claim a key role in the early development of modern banking. grew by a factor of 9. Italy is the world’s seventh-largest economy. with its post-World War I and post-World War II hyperinflations.1 25 20 15 10 5 0 -5 Real return (%) Equities Nominal return (%) Bonds Bills Standard deviation 2. Italy Figure 1 Annualized performance from 1900 to 2009 Banking innovators While banking can trace its roots back to Biblical times.

which created its stock exchange in 1878. electronics.1 for bills. Credit Suisse Global Investment Returns Sourcebook 2010 . Paul Marsh and Mike Staunton.8 5. From 1990 to 2009. From 1900 to 1939.9 -5 1900-2009 Premium vs Bonds (% p.) Figure 3 Returns and risk of major asset classes since 1900 29.9 Real return (%) Equities Nominal return (%) Bonds Bills Standard deviation 14.8 0 -5 -1.2 -7.2% and –1. losing two-thirds of its value in real terms.000 100 10 1 0. since 1900. Japan’s “economic miracle” began and equities gave a real return of 1. banking crises and deflation. Its weighting in the world index fell from 40% to 8%. Meanwhile. with income reinvested.565%.01 1900 10 20 30 40 50 60 70 80 90 2000 10 0. Real estate values were also riding high and it was alleged that the grounds of the Imperial palace in Tokyo were worth more than the entire State of California.a.4 -5.3 0 0.1% and bills by 5. Japan was the worst-performing stock market. Hopefully.1 3. with the world’s second-largest GDP. 1.2 -1.a.2 15 10 5 3. Despite the fallout from the bursting of the asset bubble. with a 40% weighting in the world index versus 32% for the USA. also founded in 1878. was to become the leading market for spot trading. With one or two setbacks.8 5.9% per year. equities beat bonds by 5. over the last 110 years. machinery and robotics.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 Country profiles_37 Capital market returns for Japan Figure 1 shows that.) Premium vs Bills (% p. For additional explanations of these figures. Japan was the world’s secondbest equity performer.0 11.3 for bonds and 0.9%. which gave a real return of –1. Japan suffered a prolonged period of stagnation. Then the bubble burst. Japan remains a major economic power.0 Source: Elroy Dimson. see page 27. Osaka was to become the leading derivatives exchange in Japan (and the world’s largest futures market in 1990 and 1991) while the Tokyo stock exchange. the real value of equities.2 0 -5. It has the world’s thirdlargest equity market as well as its second-biggest bond market.8% as compared to bonds and bills. It is a world leader in technology. Figure 3 shows that the long-term real return on Japanese equities was an annualized 3. equities kept rising for another 30 years.0 -1. Japan Figure 1 Annualized performance from 1900 to 2009 Birthplace of futures Japan has a long heritage in financial markets. and this is reflected in the composition of its equity market. the Japanese equity market was the largest in the world. grew by a factor of 63. automobiles.2 5. From 1949 to 1959.1 63 Equities Bonds Bills Figure 2 Equity risk premium over 10 to 110 years 10 5 5. But World War II was disastrous and Japanese stocks lost 96% of their real value. respectively.9 25 20 20. By the start of the 1990s.4 as compared to 0. Trading in rice futures had been initiated around 1730 in Osaka. Figure 2 shows that.1 0 0.8 -10 2000-2009 1985-2009 1960-2009 -0. this will not form the blueprint for other countries over the coming decade.

2% per year.2 -5 -8.7 9.7%.5 4. Figure 2 shows that. Dutch equities have generated a mid-ranking real return of 4. Ahold.4 2.) Premium vs Bills (% p. has enjoyed the secondlowest inflation rate among the Yearbook countries (after Switzerland). The Netherlands has a prosperous open economy. equities beat bonds by 3. respectively. since 1900.0 4. bears. The Amsterdam Exchange continues to prosper today as part of Euronext.2 1 0 1900 10 20 30 40 50 60 70 80 90 2000 10 Equities Bonds Bills Figure 2 Equity risk premium over 10 to 110 years 10 5 4.5% and bills by 4. Royal Dutch Shell. which started in 1611. see page 27.) Figure 3 Returns and risk of major asset classes since 1900 25 20 15 10 5 4. Figure 1 Netherlands Exchange pioneer Although some forms of stock trading occurred in Roman times.4 for bonds and 2.6 -10 -5.4% and 0. Annualized performance from 1900 to 2009 1.3 3.9% compared to bonds and bills.a. bubbles and other features of modern exchanges. For a small country.4 3. Philips.9% per year.0 21.4 5.7 compared to 4.7 8. the Netherlands hosts more than its share of major multinationals. Akzo Nobel. A book written in 1688 by a Spaniard living in Amsterdam (appropriately entitled Confusion de Confusiones) describes the amazingly diverse tactics used by investors. since 1900. Credit Suisse Global Investment Returns Sourcebook 2010 . over the years. Even though only one stock was traded – the Dutch East India Company – they had bulls.7 2.9 Source: Elroy Dimson.7 2000-2009 1985-2009 1960-2009 1900-2009 Premium vs Bonds (% p. grew by a factor of 200.3 4. The Amsterdam market. organized trading did not take place until transferable securities appeared in the 17th century.2 for bills.9 0 -5 Real return (%) Equities Nominal return (%) Bonds Bills Standard deviation 1. ArcelorMittal.000 201 100 10 4. For additional explanations of these figures. the real value of equities.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 Country profiles_38 Capital market returns for the Netherlands Figure 1 shows that. which ranks 16th in the world. which gave a real return of 1. Reed Elsevier and ING Group. with income reinvested. Heineken.5 0 3. Paul Marsh and Mike Staunton. It is the world’s 17th largest equity market and.4 0. Figure 3 shows that the long-term real return on Dutch equities was an annualized 4. was the world’s main center of stock trading in the 17th and 18th centuries.a. over the last 110 years. The Netherlands has traditionally been a low inflation country and. including Unilever. panics. TNT.

the real value of equities.8 0. New Zealand is perceived as the least corrupt country in the world. Figure 2 shows that.a. It was dependent on concessionary access to British markets until UK accession to the European Union. New Zealand Figure 1 Annualized performance from 1900 to 2009 Purity and integrity For a decade.7 5. The Wall Street Journal ranks New Zealand as the best in the world for business freedom.1 -10 2000-2009 1985-2009 1960-2009 1900-2009 Premium vs Bonds (% p.1 0 -0.0 1. and freedom to run businesses. Figure 3 shows that the long-term real return on New Zealand equities was an annualized 5. openness.8 5.) Figure 3 Returns and risk of major asset classes since 1900 25 20 15 10 9. the Exchange demutualized.000 537 100 10 8.7 19.5 9.5 as compared to 8. and Telecom Corporation of New Zealand. and dairy products.2 1 0 1900 10 20 30 40 50 60 70 80 90 2000 10 Equities Bonds Bills Figure 2 Equity risk premium over 10 to 110 years 10 5 3. New Zealand's economy was built upon on a few primary products. It competes globally as an export-led nation through efficient ports. and officially became the New Zealand Exchange Limited. Paul Marsh and Mike Staunton. In 2003.5 4. The New Zealand Exchange traces its roots to the Gold Rush of the 1870s. with income reinvested. and submarine fiberoptic communications. which gave a real return of 2. According to Transparency International. Over the last two decades.a.9% as compared to bonds and bills. good governance.1% per year. The largest firms traded on the exchange are Fletcher Building. Traditionally.8 5 0 -5 Real return (%) Equities Nominal return (%) Bonds Bills Standard deviation 5. equities beat bonds by 3. over the last 110 years.5 2.8 Source: Elroy Dimson. notably wool.5 for bonds and 6.2 for bills. Credit Suisse Global Investment Returns Sourcebook 2010 .9 -5 -2. since 1900.0% and 1. For additional explanations of these figures. The British colony of New Zealand became an independent dominion in 1907. airline services. the regional stock markets merged to form the New Zealand Stock Exchange. see page 27.7% respectively.9 2.) Premium vs Bills (% p.5 6.8% and bills by 4. grew by a factor of 537. free market economy. meat.1 4. 1. But the country also prides itself on honesty. New Zealand has been promoting itself to the world as “100% pure” and Forbes calls this marketing drive one of the world's top ten travel campaigns. In 1974.9 2. New Zealand has evolved into a more industrialized.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 Country profiles_39 Capital market returns for New Zealand Figure 1 shows that.0 -3.

see page 27. The Oslo stock exchange (OSE) was founded as Christiania Bors in 1819 for auctioning ships.2 for bonds and 3.9 2.a. which gave a real return of 1.2 8. This has grown to become the largest fund in Europe and the second-largest in the world.7% and 1.6 for bills.5 5.1% compared to bonds and bills.) Premium vs Bills (% p.7 1.2 Standard deviation Source: Elroy Dimson.0 27. Norway Figure 1 Annualized performance from 1900 to 2009 Nordic oil kingdom Norway is a very small country (ranked 115th by population and 61st by land area) surrounded by large natural resources that make it the world’s fourth-largest oil exporter and the second-largest exporter of fish. the real value of equities. Figure 3 shows that the long-term real return on Norwegian equities was an annualized 4. equities beat bonds by 2.4 2. Credit Suisse Global Investment Returns Sourcebook 2010 . The exchange now forms part of the OMX grouping of Scandinavian exchanges. over the last 110 years.3 compared to 6. DnB NOR.9% per year.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 Country profiles_40 Capital market returns for Norway Figure 1 shows that.8 million enjoys the second-largest GDP per capita in the world and lives under a constitutional monarchy outside the Eurozone (a distinction shared with the UK). education and standard of living. In the 1990s.2 3. Figure 2 shows that. For additional explanations of these figures.0 5. ranks Norway the best country in the world for life expectancy.0 4. commodities and currencies. 1.3 2. the Government established its petroleum fund to invest the surplus wealth from oil revenues. this extended to trading in stocks and shares.2 0 1. grew by a factor of 86.4 2. since 1900.9 -5 -10 2000-2009 1985-2009 1960-2009 1900-2009 Premium vs Bonds (% p. The population of 4. and its asset value is now comparable to that of the Oslo stock exchange. Paul Marsh and Mike Staunton.8 3. The largest OSE stocks are Statoil.2%. through its Human Development Index. Later. The United Nations.2 7. respectively.) Figure 3 Returns and risk of major asset classes since 1900 25 20 15 10 5 4.6 1 0 1900 10 20 30 40 50 60 70 80 90 2000 10 Equities Bonds Bills Figure 2 Equity risk premium over 10 to 110 years 10 5 4.a.000 100 86 10 6.1 0 -5 Real return (%) Equities Nominal return (%) Bonds Bills 1.5 12. with income reinvested.4% and bills by 2. and Telenor. The fund invests predominantly in equities.

once the keystone of South Africa’s economy. with a sophisticated financial structure and the world’s 17th largest equity market.1 Equities Bonds Bills Figure 2 Equity risk premium over 10 to 110 years 10 5 3. South Africa Figure 1 Annualized performance from 1900 to 2009 Golden opportunity The discovery of diamonds at Kimberley in 1870 and the Witwatersrand gold rush of 1886 had a profound impact on South Africa’s subsequent history.1% per year. see page 27. 75% of its chrome and 41% of its gold. are still a third of the JSE’s capitalization.3 for bonds and 3. According to index compilers.0% respectively. with income reinvested. South Africa is the largest economy in Africa. Paul Marsh and Mike Staunton.5 10. vanadium and coal. Resource stocks. 10.2 6.4% and bills by 6.) Premium vs Bills (% p.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 Country profiles_41 Capital market returns for South Africa Figure 1 shows that. generating real equity returns of 7. the second-highest return among the Yearbook countries. Credit Suisse Global Investment Returns Sourcebook 2010 . the Johannesburg Stock Exchange (JSE) opened in 1887.0 12. Today. Today.) Figure 3 Returns and risk of major asset classes since 1900 25 20 15 10 5 0 -5 Real return (%) Equities Nominal return (%) Bonds Bills Standard deviation 7. For additional explanations of these figures.7 6.9 as compared to 6.2 1.4 6. The 1886 gold rush led to many mining and financing companies opening up. together with several other Yearbook countries. equities beat bonds by 5.000 100 10 1 0 1900 10 20 30 40 50 60 70 80 90 2000 10 6.127 1. Over the years since 1900. as well as vital deposits of diamonds.6 Source: Elroy Dimson. has declined in importance as the economy has diversified. which gave a real return of 1. South Africa.2% per year.000 2.a. and Standard Bank. grew by a factor of 2126. The largest JSE stocks are MTN.3 0 5.3 4. Figure 2 shows that. Sasol. and it today ranks as the sixth-largest emerging market.1 for bills. since 1900. over the last 110 years.4 6. Figure 3 shows that the long-term real return on South African equities was an annualized 7.0 6.1 -5 -10 2000-2009 1985-2009 1960-2009 1900-2009 Premium vs Bonds (% p. would have been deemed an emerging market.7% and 1. it has not yet emerged.1 5.2% as compared to bonds and bills.3 3.6 6.7 1. 80% of its manganese. Gold. the real value of equities.a. Back in 1900. the South African equity market has been one of the world’s most successful. and to cater for their needs. however.3 22. South Africa has 90% of the world’s platinum.0 2.

5 3. the 1930s and 1970s saw the very worst returns among our countries.8% compared to bonds and bills.7 compared to 4. The modern style of Spanish bullfighting is described as daring and revolutionary. Telefonica. heightened by Spain’s dependence on imports for 70% of its energy needs. see page 27. 100 59 10 4.9 11. helped by strong economic growth since the 1980s.a. The major Spanish companies retain strong presences in Latin America combined with increasing strength in banking and infrastructure across Europe.) Figure 3 Returns and risk of major asset classes since 1900 25 20 15 10 9. Credit Suisse Global Investment Returns Sourcebook 2010 .5 for bills.4%. and BBVA. While the 1960s and 1980s saw Spanish real equity returns enjoying a bull market and ranked second in the world.5 2.7 4. Though Spain stayed on the sidelines during the two world wars. Paul Marsh and Mike Staunton. equities beat bonds by 2. Figure 2 shows that. The Madrid Stock Exchange was founded in 1831 and it is now the 11th largest in the world.4% and 0. grew by a factor of 58. which gave a real return of 1. Spain Figure 1 Annualized performance from 1900 to 2009 Key to Latin America Spanish is the most widely spoken international language after English.5 1. since 1900.5 0 3. Partly for this reason. The largest stocks are Banco Santander. over the last 110 years.2 5.4% and bills by 3. the real value of equities.5 1 0 1900 10 20 30 40 50 60 70 80 90 2000 10 Equities Bonds Bills Figure 2 Equity risk premium over 10 to 110 years 10 8. Spain has a visibility and influence that extends way beyond its Southern European borders.5 5 0.9 5 3. and has the fourth-largest number of native speakers after Chinese.a.) Premium vs Bills (% p. respectively.4 3.4 -5 -10 2000-2009 1985-2009 1960-2009 1900-2009 Premium vs Bonds (% p. while the return to democracy in the 1970s coincided with the quadrupling of oil prices.8 0 -5 Real return (%) Equities Nominal return (%) Bonds Bills Standard deviation 1.4 7. Hindi and English.0 5. Spanish stocks lost much of their real value over the period of the civil war during 1936–39. and that is an apt description of real equity returns over the century.2 Source: Elroy Dimson.8 22. For additional explanations of these figures.3 6.4% per year. with income reinvested. Figure 3 shows that the long-term real return on Spanish equities was an annualized 3.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 Country profiles_42 Capital market returns for Spain Figure 1 shows that.5 for bonds and 1.4 0. and carries weight throughout Latin America.

5 8. For additional explanations of these figures.4 5. and the benefits of resource wealth and the development. with income reinvested. of industrial holding companies. and that on bills only 1.0 6. Figure 3 shows that the long-term real return on Swedish equities was an annualized 6. Figure 2 shows that.5 1. respectively.9%.9 0 -3.9 6. equities beat bonds by 3.000 731 100 14. the winners would have enjoyed immense fortune as well as fame. and Svenska Handelsbank.4 4. Sweden Figure 1 Annualized performance from 1900 to 2009 Nobel prize returns Alfred Nobel bequeathed 94% of his total assets to establish and endow the five Nobel Prizes (first awarded in 1901).2 -10 2000-2009 1985-2009 1960-2009 1900-2009 Premium vs Bonds (% p.a.5 for bonds and 8. The largest SSE stocks are Nordea Bank.5% per year. Had the capital been invested in domestic equities.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 Country profiles_43 Capital market returns for Sweden Figure 1 shows that.6% and bills by 4. since 1998. they have returned 6.a. It is the world’s 19th largest equity market and.) Figure 3 Returns and risk of major asset classes since 1900 25 20 15 10 10. Despite the high rankings for real bond and bill returns.9% per year.0 5 0 -5 Real return (%) Equities Nominal return (%) Bonds Bills Standard deviation 6. grew by a factor of 730. see page 27. Credit Suisse Global Investment Returns Sourcebook 2010 . bonds and bills all ranked in the top three. 1.5% and 1.9 -5 -1.6 3.1 5. Were Sweden to win a Nobel prize for its investment returns. Australia and South Africa. behind the two highestranked countries. which gave a real return of 2. Ericsson.6 4.) Premium vs Bills (% p. it would be for its achievement as the only country to have real returns for equities.2 for bills.2 2.2 10 1 0 1900 10 20 30 40 50 60 70 80 90 2000 10 Equities Bonds Bills Figure 2 Equity risk premium over 10 to 110 years 10 5 2.9 Source: Elroy Dimson.6 6.2% per year. since 1900.2% compared to bonds and bills.8 12. current Nobel prize winners will rue the instruction to invest in safe securities as the real return on bonds was only 2. The Stockholm stock exchange was founded in 1863 and is the primary securities exchange of the Nordic countries. over the last 110 years.9 compared to 14. in the 1980s. has been part of the OMX grouping. Real Swedish equity returns have been supported by a policy of neutrality through two world wars. the real value of equities. Paul Marsh and Mike Staunton. instructing that the capital be invested in safe securities. Overall.5 22.2% per year.

8 compared to 9.) Figure 3 Returns and risk of major asset classes since 1900 25 20 15 10 9.8 2.1%.6 for bonds and 2. Switzerland is.3% compared to bonds and bills. and private banking has been a major Swiss competence for over 300 years. Swiss neutrality.6 2. accounting for 3.4 0 -3.3 -10 2000-2009 1985-2009 1960-2009 1900-2009 Premium vs Bonds (% p. which gave a real return of 2. over the last 110 years.4 5 4.3 0 -5 Real return (%) Equities Nominal return (%) Bonds Bills Standard deviation 2.7 2. Major listed companies include world leaders such as Nestle. For additional explanations of these figures. It is now the world’s eighth-largest equity market. Figure 3 shows that the long-term real return on Swiss equities was an annualized 4. Meanwhile.a. with income reinvested.0 19.008% of its land mass.1% and bills by 3. Switzerland punches well above its weight financially and wins several gold medals in the global financial stakes. of course.4% per year. the real value of equities. close to 30% of all cross-border private assets invested worldwide are managed in Switzerland. 1.1 0.7 4.4 for bills.9 Source: Elroy Dimson.1% and 0. Figure 2 shows that. respectively. one of the world’s most important banking centers. low inflation and a strong currency have all bolstered the country’s reputation as a safe haven. Novartis and Roche.000 100 98 10 9.8%.3 4.4 3.8 6.a. sound economic policy. see page 27. Switzerland has also enjoyed the world’s lowest inflation rate: just 2.3% per year since 1900.2 6. Swiss equities have achieved a mid-ranking real return of 4. since 1900. equities beat bonds by 2. Today.4 1 0 1900 10 20 30 40 50 60 70 80 90 2000 10 Equities Bonds Bills Figure 2 Equity risk premium over 10 to 110 years 10 5 4. Credit Suisse Global Investment Returns Sourcebook 2010 . Since 1900.1 3.3%. Switzerland Figure 1 Annualized performance from 1900 to 2009 Traditional safe haven For a small country with just 0.) Premium vs Bills (% p.1% of total world value. The Swiss stock market traces its origins to exchanges in Geneva (1850).1 5.1% of the world’s population and 0. with an annualized real return of 2. while Switzerland has been one of the world’s three best-performing government bond markets. Zurich (1873) and Basel (1876).CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 Country profiles_44 Capital market returns for Switzerland Figure 1 shows that. Paul Marsh and Mike Staunton.4 -5 -0. grew by a factor of 97. the Swiss franc has been the world’s strongest currency.

3 13. United Kingdom Figure 1 Annualized performance from 1900 to 2009 Global center Organized stock trading in the UK dates from 1698. the US equity market overtook the UK.1 Source: Elroy Dimson.) Figure 3 Returns and risk of major asset classes since 1900 25 20 15 10 9.9 4. with 36% of global turnover.0%. Figure 3 shows that the long-term real return on UK equities was an annualized 5.7 20. which gave a real return of 1. see page 27.1 3. equities beat bonds by 3.3 0 -5 Real return (%) Equities Nominal return (%) Bonds Bills Standard deviation 1.a.1 -5 -2.2 -10 2000-2009 1985-2009 1960-2009 1900-2009 Premium vs Bonds (% p. with income reinvested. The London foreign exchange market is the largest in the world. What continues to set London apart. 1. respectively. It is the world’s largest fund management center. grew by a factor of 286.4 5 5. London is the world’s banking center. and sixth-largest bond market.2% per year.1 for bills. and many other services.000 287 100 10 4. This mostly took place in City of London coffee houses until the London Stock Exchange was formally established in 1801.3 5. It is also a major center for commodities trading.a. managing almost half of Europe’s institutional equity capital. the UK equity market was the largest in the world.3 1.3 for bonds and 3. Credit Suisse Global Investment Returns Sourcebook 2010 .9% and bills by 4. specializing in global and cross-border finance.1 1 0 1900 10 20 30 40 50 60 70 80 90 2000 10 Equities Bonds Bills Figure 2 Equity risk premium over 10 to 110 years 10 5 1.0 6.0 0 -3. third-largest insurance market.3 4. and is home to some 1. and nowadays. Today.5 3. and London has the world’s third-largest stock market. the real value of equities.3 3. Early in the 20th century. More than half of the global foreign equity market and 70% of Eurobonds are traded in London.0 5. For additional explanations of these figures. cross-border nature of much of its business. Paul Marsh and Mike Staunton.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 Country profiles_45 Capital market returns for the United Kingdom Figure 1 shows that. since 1900. is the global. over the last 110 years. London is the world leader for derivatives traded overthe-counter.000 hedge funds. and London was the world’s leading financial center. and justifies its claim to be the world’s leading international financial center. Figure 2 shows that.) Premium vs Bills (% p. shipping. By 1900.3% and 1.0 3.3% compared to bonds and bills.9 compared to 4. with 550 international banks and 170 global securities firms having offices in London. both New York and Tokyo are larger than London as financial centers.

6 compared to 8. US equities and US bonds have given real returns of 6. For additional explanations of these figures.2% per year.2% and 1. or of future equity returns for the USA itself. 1.0 2.2 5. The New York Stock Exchange traces its origins back to 1792.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 Country profiles_46 Capital market returns for the United States Figure 1 shows that.a. The USA also has the world’s largest bond market. Paul Marsh and Mike Staunton.8 1 0 1900 10 20 30 40 50 60 70 80 90 2000 10 Equities Bonds Bills Figure 2 Equity risk premium over 10 to 110 years 10 5 0. respectively.0 3. the real value of equities.9 -5 5.2 -7. since 1900. Its stock market accounts for 41% of total world value. After the fall of communism. the USA has gone from zero to a 41% share of the world’s equity markets. Thus.4 -10 2000-2009 1985-2009 1960-2009 1900-2009 Premium vs Bonds (% p. see page 27. it became the world’s sole superpower. which is over five times as large as Japan. respectively. the United States rapidly became the world’s foremost political. US financial markets are also the best documented in the world and. Since 1900.9 5.7 4.2 2. The USA is also a financial superpower.) Premium vs Bills (% p.7 0 -2. until recently. and economic power. grew by a factor of 726. respectively. Credit Suisse Global Investment Returns Sourcebook 2010 . which gave a real return of 1. That is why this Yearbook focuses on global returns. the Dutch and UK stock markets were already nearly 200 and 100 years old. equities beat bonds by 4.2% and bills by 5.9%.2% compared to bonds and bills. with income reinvested.) Figure 3 Returns and risk of major asset classes since 1900 25 20 15 10 9.2 4. Investors can gain a misleading view of equity returns elsewhere. United States Figure 1 Annualized performance from 1900 to 2009 Financial superpower In the 20th century.7 20. Figure 2 shows that. Figure 3 shows that the long-term real return on US equities was an annualized 6.3 4.000 727 100 10 8. and the dollar is the world’s reserve currency.2 1.8 for bills. Extrapolating from such a successful market can lead to “success” bias. most of the long-run evidence cited on historical asset returns drew almost exclusively on the US experience. military. rather than just those from the USA.9% and 0.4 Source: Elroy Dimson.2 for bonds and 2.9%. It has the world’s largest economy. over the last 110 years.9 10.3 5 0 -5 Real return (%) Equities Nominal return (%) Bonds Bills Standard deviation 6. There is an obvious danger of placing too much reliance on the excellent long run past performance of US stocks. At that time.9 0.a. in just a little over 200 years.

4 -5 -6. World Figure 1 Annualized performance from 1900 to 2009 Globally diversified It is interesting to see how the 19 Yearbook countries have performed in aggregate over the long run.9 3.5% per year for the average country and 20.7 0. Paul Marsh and Mike Staunton. or in years before capitalizations were available.7% and bills by 4.) Premium vs US Bills (% p.a.8 Source: Elroy Dimson. which gave a real return of 1. These indexes represent the long-run returns on a globally diversified portfolio from the perspective of an investor in a given country. We have therefore created a 19-country world equity index denominated in a common currency.6 -10 2000-2009 1985-2009 1960-2009 1900-2009 Premium vs Bonds (% p.4% as compared to bonds and bills.6 1. Figure 2 shows that. We also compute a 19-country world bond index.7 3. see page 27.8 -0.9 4.7 17. The risk reduction achieved through global diversification remains one of the last “free lunches” available to investors. Figure 1 shows that the real return on the world index was 5.7% per year for bonds.8% per year. in which each country is weighted by its starting-year equity market capitalization.4% per year. For additional explanations of these figures.) Figure 3 Returns and risk of major asset classes since 1900 25 20 15 10 5 5. the real value of equities.4 2. and 1.7% and 0. 1. The charts opposite show the returns for a US global investor.8 3.4% per year for equities.a. and the equity premium versus bills is measured relative to US treasury bills. grew by a factor of 331.9 10. Over the 110 years from 1900 to 2009. real returns are measured relative to US inflation.4 4. It also shows that the world equity index had a volatility of 17. equities beat bonds by 3.9 0 -1.4% per year for the USA.4 for bonds and 2. Figure 3 shows that the long-term real return on World equities was an annualized 5. by its GDP.9% respectively. Credit Suisse Global Investment Returns Sourcebook 2010 . with income reinvested. This compares with 23. The world indexes are expressed in US dollars. since 1900.4 as compared to 6.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 Country profiles_47 Capital market returns for World Figure 1 shows that.7 4.8 1 0 1900 10 20 30 40 50 60 70 80 90 2000 10 Equities Bonds US Bills Figure 2 Equity risk premium over 10 to 110 years 10 5 5.000 331 100 10 6.4 0 -5 Real return (%) Equities Nominal return (%) Bonds US Bills Standard deviation 8. with each country weighted by GDP.8 for bills.1 0. over the last 110 years.

equities beat bonds by 3.7 2.7 for bonds and 2. using exactly the same principles. Figure 3 shows that the long-term real return on World ex-US equities was an annualized 5. which is 1. Figure 2 shows that.0% as compared to bonds and bills.0% per year.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 Country profiles_48 Capital market returns for the World ex-US Figure 1 shows that.0% per year.5 Source: Elroy Dimson.8 4. 1.9 8. Investors can gain a misleading view of equity returns elsewhere.2% per year below that for the USA. Although we are excluding just one out of 19 countries. Credit Suisse Global Investment Returns Sourcebook 2010 .7 20. from the perspective of a US-based international investor.2 -5 -1.a. For additional explanations of these figures. We argued that focusing on such a successful economy can lead to “success” bias. it is nevertheless important to look at global returns. The charts opposite confirm this concern.8 as compared to 3. over the last 110 years.0 -10 2000-2009 1985-2009 1960-2009 1900-2009 Premium vs Bonds (% p. the real return on the world ex-US equity index was 5. until recently.9% respectively. rather than just focusing on the USA. although the USA has not been a massive outlier. grew by a factor of 214. They show that.8 for bills.a.8% and bills by 4.) Premium vs US Bills (% p. which gave a real return of 1.2 0. We noted above that. since 1900.3 10 5 5.) Figure 3 Returns and risk of major asset classes since 1900 25 20 15 14. the USA accounts for roughly half the total equity market capitalization of our 19 countries. the real value of equities. so the 18-country world ex-US equity index represents approximately half the total value of the world index.000 215 100 10 3. we also construct two world indexes that exclude the USA. World ex-US Figure 1 Annualized performance from 1900 to 2009 Rest of the world In addition to the two world indexes.0 0 -5 Real return (%) Equities Nominal return (%) Bonds US Bills Standard deviation 1.4 -5.2% and 0. see page 27.1 4. This suggests that.3 4.6 0 -0. with income reinvested.2 0.9 4. or of future equity returns for the USA itself.2 3.2 3. most of the longrun evidence cited on historical asset returns drew almost exclusively on the US experience.8 1 0 1900 10 20 30 40 50 60 70 80 90 2000 10 Equities Bonds US Bills Figure 2 Equity risk premium over 10 to 110 years 10 5 5. Paul Marsh and Mike Staunton.

8 0 -5 Real return (%) Equities Nominal return (%) Bonds US Bills Standard deviation 0. with income reinvested.8 -5 -5. the real value of equities. It is interesting to assess how well European countries as a group have performed. or to the fact that many of the New World countries were resource-rich. equities beat bonds by 3. We have therefore constructed a 13-country European index using the same methodology as for the world index. Paul Marsh and Mike Staunton.8% per year. This compares with 5.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 Country profiles_49 Capital market returns for Europe Figure 1 shows that. grew by a factor of 167.8%. Germany.5 for bonds and 2.9 7. Figure 1 opposite shows that the real equity return on European equities was 4. Credit Suisse Global Investment Returns Sourcebook 2010 .8 0. the figures opposite are in US dollars from the perspective of a US international investor. over the last 110 years.1 1. Sweden and the UK. or perhaps to the greater vibrancy of New World economies.7 -10 2000-2009 1985-2009 1960-2009 1900-2009 Premium vs Bonds (% p.8% as compared to bonds and bills. since 1900. Europe Figure 1 Annualized performance from 1900 to 2009 The Old World The Yearbook documents investment returns for 13 European countries. As with the world index.0 5 0.4% for the world index. the Netherlands and Spain) and five European markets that are outside the euro area (Denmark.8 for bills. Norway and Switzerland). Loosely. indicating that the Old World countries have underperformed.) Premium vs US Bills (% p. Figure 2 shows that.6 Source: Elroy Dimson. This may relate to the destruction from the two world wars.9 as compared to 2.4 10 5 4.4 0 1.9 4. where Europe was at the epicenter. Figure 3 shows that the long-term real return on European equities was an annualized 4.9% respectively.9% and bills by 3.6 3. Finland. France.a.5 1 0 1900 10 20 30 40 50 60 70 80 90 2000 10 Equities Bonds US Bills Figure 2 Equity risk premium over 10 to 110 years 10 8.9 3.7 21.9 3. 1. compared with our world index. we might argue that these 13 countries come from the Old World.8% and 0.8 2. For additional explanations of these figures. and from outside the EU. They comprise eight euro currency area states (Belgium.3 4. For consistency. Ireland.) Figure 3 Returns and risk of major asset classes since 1900 25 20 15 15.8 3.a. which gave a real return of 0. see page 27. Italy. this European index can be designated in any desired common currency.000 168 100 10 2.

he codesigned the FTSE 100-Share Index and ABN AMRO’s Hoare Govett Smaller Companies Index. and hedge funds. the Norwegian Government Pension Fund.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010 Country profiles_50 About the authors Elroy Dimson is Emeritus Professor of Finance at London Business School. and travels extensively in Europe. Journal of Financial Economics. Faculty Dean. capital flows. where he produces the London Business School Risk Measurement Service. He is a member of the group’s Global Economics and Strategy group. Wilmot worked for Bank of America and Merrill Lynch as a foreign exchange economist and bond analyst before joining Credit Suisse First Boston in 1985. an elected Governor and Associate Dean Finance Programmes. He has been appointed to Honorary Fellowships of the UK Society of Investment Professionals and of the Institute of Actuaries. His work focuses on both secular and cyclical trends in the global economy. where he has been an elected Governor. Chair of the Finance and Accounting areas. pension funds. Deputy Principal. and Dean of the School’s MBA and EMBA programmes. He has taught at universities in the United Kingdom. the Far East. After reading Philosophy. Financial Analysts Journal. previously. Within London Business School he has been Chair of the Finance area. published by Wiley and writes a regular column for Wilmott magazine. London University. Politics and Economics (PPE) at Oxford. His PhD in Finance is from London Business School. . Journal of Portfolio Management. and investment strategy across all major asset classes. He holds board and investment committee positions with Guy’s & St Thomas’ Charity. He has advised on several public enquiries. Journal of Finance. Mr. and until recently. The Foundation for Social Entrepreneurs. Paul Marsh is Emeritus Professor of Finance at London Business School. and Journal of the Operations Research Society. and other journals. Harvard Business Review. In the subsequent 25 years. He is a Director and Past President of the European Finance Association and has been elected to membership of the Financial Economists Roundtable. With Elroy Dimson. and America to meet with the world’s leading asset managers. Mike Staunton is Director of the London Share Price Database. Hong Kong and Switzerland. of M&G and Majedie Investments. Dr Dimson has published articles in Journal of Business. His PhD in Finance is from London Business School. His PhD in Finance is from London Business School. and their implications for policy. and is currently a Director of Aberforth Smaller Companies Trust and. he has established a reputation as one of the best and most original strategists in the industry. and has acted as a consultant to a wide range of financial institutions and companies. Journal of Finance. Dr Staunton is co-author with Mary Jackson of Advanced Modelling in Finance Using Excel and VBA. produced since 1987 at London Business School. Jonathan Wilmot is a Managing Director of Credit Suisse and Chief Global Strategist in the Investment Banking division of Credit Suisse. Financial Analysts Journal. a research resource of London Business School. and other journals. Dr Marsh has published articles in Journal of Business. He has had articles published in Journal of Banking & Finance. Journal of Portfolio Management. Journal of Financial Economics. official institutions.

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Credit Suisse Securities (Thailand) Limited. accounting or tax advice. are associated but independent legal and regulated entities within the Credit Suisse. electronic.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010_51 General disclaimer / Important information This document was produced by and the opinions expressed are those of Credit Suisse as of the date of writing and are subject to change. documents that incorporate reproduced or derived materials must include a reference to Elroy Dimson. or in part. . you should consider the suitability of the transaction to your particular circumstances and independently review (with your professional advisers as necessary) the specific financial risks as well as legal. Paul Marsh and Mike Staunton. e-mail prowham@london. Please address requests to Patricia Rowham. To obtain permission. Inc. economic risks. each chart and table must carry the acknowledgement Copyright © 2010 Elroy Dimson. pmarsh@london. 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