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Fed rate hikes will drive down long-term returns – Credit Suisse

Credit Suisse has released a report which forecasts real equity returns will be limited to 4-6% over the next ten years and real bond returns will be close to zero. These predictions are in line with those of fund selectors.


Credit Suisse’s return expectations grosso modo coincide with those of European fund buyers. According to Expert Investor data, investors across Europe on average expect an annual return of approximately 6% for equities. Though return expectations differ slightly per country per country for equities, fund buyers are unanimous when it comes to bond returns: in every country we surveyed over the past six months, fund buyers expect an annualised return between 0 and 2% for a balanced bond portfolio in the next five years.

The ‘Global Investment Returns Yearbook’ is based on analysis of 70,000 days of financial market history and 2400 country-years of data across 21 countries.

On behalf of the bank, professors Elroy Dimson and Paul Marsh and Dr Mike Staunton of London Business School examined the reaction of financial markets to both rate rises and cuts, as well as the investment performance of trading strategies over rate hiking and easing cycles.

Data from ‘the three great crises’ of the 1890s, 1930s and since 2008−09 was used in the study.

Diminishing risk premium

“The equity risk premium is the return on equities in excess of the return on cash,” Marsh said. “In the USA, the risk premium during periods of tightening interest rates was just 1.8% p.a, compared with 8.8% p.a. during periods when rates were falling. In the UK, the entire equity premium was earned during loosening periods, and investors would have been better off being out of the equity market while interest rates were rising.”

Credit Suisse has simultaneously published the ‘Global Investment Returns Sourcebook’ which examines risk over the long run and the historical extremes of investment performance for equity and bonds, and presents the detailed 116-year dataset that underpins the yearbook.

“The Fed’s rate hike last December was the first-ever in the professional lives of a generation of investors and traders, and however slow, the trend is now upwards, creating uncertainty and squeezing out overvaluations across the asset spectrum,” said Giles Keating, deputy global chief investment officer at Credit Suisse.

“The yearbook provides an invaluable historical perspective on this, with its treasure-chest of data and analysis across 21 countries and more than a century of data,” he added.

The Credit Suisse yearbook is available to download here