Wednesday, 25 February 2015

Crédit Suisse Global Investment Returns Yearbook 2015

Note: Latest update on the topic of Crédit Suisse Global Investment Returns Yearbooks:
Abnormal Returns (2017)

Every year in February, this much appreciated publication finds its way among investors. A short introduction to the main subjects covered:

Industries: their rise and fall

The 2015 edition focuses on sector allocation and industry dominance over well determined periods. A comparison of the breakdown of the total market capitalization in 1900 as compared to the one today immediately shows the tremendous change societies went through.

The comparison was made both for the UK and for the US. It also shows how different both economies were back then and what characteristics persisted throughout the past century until the present day. A decent example is the important financial sector in the UK, which was second only to the dominant railroad companies in 1900 and still is second after oil and gas in 2015. Its market share has barely shrunk, despite the 2008 financial crisis.

Societies have become more complex and as a result, the market breakdown of our corporate world has become much more varied than what it was like over a century ago. As usually, it didn't pay off to be invested in the leading industries of the period, but rather be diversified allowing the growth stories of later decades to contribute to the return. "Other industries" were a unspecified small category in 1900. Yet by 2015 they grew to a total of over 50% of the US market share and only little less in the UK. Both Technology, Oil&gas, Chemical and Pharmaceutical industry materialized from that unspecified small 1900 category.

Another point of attention is how fast disruptive new technologies may turn society upside down, making prior leading industries obsolete in relatively little time. A 19th century illustration is given of railroads ending canal boat shipping and passenger transport. A second example could have been how the almighty photographic concern Eastman Kodak was brought to its knees in little over a decade after the breakthrough of its digital competitor shortly before the turn of the century.

Responsible investing: Does vice pay off? *

Investors are increasingly concerned about social, environmental and ethical issues, and asset managers are under growing pressure to demonstrate responsible investment behavior. This can take the form of “exit” via ethical screening, or “voice” through engagement and intervention.
The chapter shows that “sin” can pay mainly because those choosing to exit “sinful” stocks can cause them to offer higher returns to those less troubled by ethical considerations. However, the expected financial impact of modest exclusions is generally small.
Evidence is provided that corporate engagement can pay, whether the focus is on environmental and social issues or on corporate governance.
(*) OK, I scrambled the title a little. Sounds more catchy than 'Does it pay to be bad?'.

Do equity discount rates mean revert?

A last chapter before turning to the country reports: Mean reversion is a natural phenomenon that provides contrarian investors with a powerful rationale for making and justifying their investment choices.
Well-behaved macro signals are highly prized but elusive. Investors often ask if changes in the cost of capital for equity markets can be predicted, and if the likelihood and magnitude of those changes can be quantified. They would like to know if there is an equilibrium or mean-reverting level for the cost of capital and, if so, how quickly does it revert?

Statistical evidence is disappointing, which makes the author state: The bitter truth about mean reversion is that “Predictions are hazardous, especially about the future.” – Danish proverb, ascribed to Nobel Prize winner Niels Bohr.

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A copy of the CS Global Investment Returns Yearbook 2015 can be downloaded here from the Crédit Suisse website.

The Credit Suisse website no longer provides access to prior editions. Dysfunctional links were removed.

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