Global Stock Losses Equal $2,000 for Everyone on Earth

February 5, 2003
By Simon Johnson

LONDON, Feb 5 (Reuters) - The worst bear market since the Second World War has wiped $13 trillion from the value of global stock markets over the last two years, the equivalent of $2,000 for every man, woman and child on the planet, new research showed on Wednesday.

And, in the U.K. at least, the money has only a 50 percent of coming back over the next 15 years, according to the research by the London Business School and banking group ABN Amro AAH.AS .

The losses over the last three years stem from a catalogue of investor woes from the bursting of the techology bubble, the collapse of confidence in company management triggered by scandals at Enron and WorldCom and looming war in Iraq.

But despite the gloom, the report shows investors over the 103 year period of the study would still have been better investing in stocks than bonds.

"The study supports our view that while we cannot expect double digit returns in the low inflation low growth world we live in today, there is a decent premium of four percent for investing in equities," said Mark Brown, global head of research at ABN Amro.

"We would argue that valuations are now down to a realistic level and on a cautious basis we would be net buyers of equities."

After three years of falling markets, however, both private and corporate investors have been turning away from stocks.

Pension funds -- now with a global deficit of $2.5 trillion thanks to equity market falls -- are switching to bonds, insurance companies are forced sellers of stocks as they struggle to meet solvency rules and bruised private savers are looking for less risky places to put their cash.


DISENCHANTMENT

Despite the disenchantment, those who can take a long-term view should not abandon stock markets, the report suggests.

Over the 103 years of the study, equities in all sixteen markets covered have beaten bonds. On an annualised basis, returns after inflation on equities were positive in all markets covered -- typically between four percent and six percent.

Australia has produced the best performance with stocks returning an annualised 7.4 percent against bonds' 1.4 percent.

Britain and the United States have also been strong performers between 1900 and 2002. British stocks returned 5.2 percent annually versus 1.3 percent for bonds and U.S. stocks are up 6.3 percent, ahead of a 1.9 percent gain for fixed income.

Bonds on the other hand have been a mixed bag.

Japan has seen a negative annual real return on bonds over the whole period, as have Germany, France and Italy.

Investors' memories are notoriously short, however, and they are more likely to focus on the fact that over the last two years bonds have streaked ahead of equities.

Globally, long-dated government bonds returned 7.0 percent annually between the start of 2000 and the end of 2002 against a 17.3 percent fall in stock markets.

U.S. bonds returned 11.4 percent annually against a fall of 16.4 percent in stocks. British stocks fell 15.5 percent against a gain of 4.0 percent in bonds.

With equity valuations at multi-year lows, many analysts are suggesting now could be the time to buy stocks. But the study doesn't give much cause for optimism.

The maths is complex, but authors Elroy Dimson, Paul Marsh and Mike Staunton say there is only a 50 percent chance of the FTSE 100 index returning to its high of December 1999 within 15 years.

If the current bear market reflects the situation in the U.S. after the 1929 crash or Japan of the 1990's things could be a lot worse.

"The process is likely to be one of getting rich slowly," the report says.

"Investors should take a long-term view, and be ready for the inevitable periodic setbacks."

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