Away from the short-term turmoil of the nowhere-near-over coronavirus pandemic, the March 2021 edition of the Credit Suisse Global Investment Returns Yearbook has some interesting – and potentially alarming – information about returns over the really long term. In this case, the timeframe is from 1900 to 2020. Unfortunately, the pullback from a narrow focus on short-term crisis is anything but reassuring.
One of the most remarked-upon findings in the report is in the section on return experiences across generations. It tracks return expectations on stocks, bonds, and a 70:30 mix of the two since 1950. The story is one of steadily diminishing expectations across each 15-year generational cohort.
Baby boomers, the first post-war babies, could enjoy real returns of 6.4% on that 70:30 portfolio. Generation X and millennials would experience slightly less, at 5.9% and 5.7%, respectively. But Generation Z, born between 1997 and 2012, can only look forward to a 2% real return on that portfolio. “Many savers, investors, pension plans, endowments and institutions are challenged by the low-return world,” the report notes.
Yet the world doesn’t seem exactly short on capital, a.k.a. money. Last August, Bloomberg warned that the total stock market capitalisation worldwide had reached US$87.83 trillion, in excess of the 2019 global gross domestic product of $87.75 trillion. It’s an alarming indicator of massive capital chasing returns, but apparently not ready to deliver those returns into the hands of individual investors.
From the mountain of dry powder in the private equity markets to the colossal losses and market damage wrought by the collapse of Archegos Capital Management – which impacted Credit Suisse among others – you can see signs of the same pattern emerging. That capital appears highly mobile, opportunistic and hungry for new opportunities. And ready to do anything but deliver returns to Gen Z.
At first glance, this looks very like French economist Thomas Piketty’s thesis that long-term returns on investment are reverting to a historic pattern of around 3% overall, and that the 20th century’s experience, and expectations, have been heavily skewed by major technological and social change and devastating wars.
Surprisingly, Piketty isn’t mentioned once in the Credit Suisse report. However, its findings might also bear out his prediction that the world is reverting, or perhaps already has reverted, to a patrimonial economy where inherited wealth and stocks accumulated over the long term will outperform just about any other investment option.
No wonder Credit Suisse is so eager to shift attention to emerging and frontier markets, where there are still enough growth prospects to deliver the 20th-century model and to buttress faith in the old free-market principles. Elsewhere, could anyone be surprised if Gen Z withdraws its support from a system likely to yield such dismal returns?