Credit Suisse Global Investment Yearbook 2011

Credit Suisse Global
lnvestment Peturns
Yearbook 2011
February 2011
Rosourch Inst|tute
Thought |eadersh|p from Cred|t Su|sse Pesearch
and the wor|ds foremost experts
Contents
5 Fear of fa|||ng
15 The quest for y|e|d
25 Market-|mp||ed returns. Past and present
31 Country prof||es
32 Ausru||u
33 Bo|g|um
34 Cunudu
35 Donmurk
36 F|n|und
37 Frunco
38 Oormuny
39 lro|und
40 lu|y
4! Jupun
42 Nohor|unds
43 Now Zou|und
44 Norwuy
45 Souh Ar|cu
46 Spu|n
47 Swodon
48 Sw|.or|und
49 Un|od K|ngdom
50 Un|od Suos
5! Wor|d
52 Wor|d ox-US
53 Europo
54 Authors
55 Impr|nt / D|sc|a|mer
For more |nformat|on on the f|nd|ngs
of the Cred|t Su|sse G|oba| Investment
Peturns Yearbook 2011, p|ease contact
e|ther the authors or.
M|chuo| OSu|||un, Houd o UK Rosourch
und Poro||o Anu|ys|s, Crod| Su|sso
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To conuc ho uuhors or o ordor pr|nod
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uccompuny|ng Sourcobook, soo pugo 55.
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CREDlT SUlSSE OLOBAL lNvESTMENT RETURNS YEARBOOK 20!!_2
Introduct|on
Tho Crod| Su|sso O|obu| lnosmon Rourns Yourbook 20!! pro|dos
!!! yours o duu on |nunc|u| murko rourns |n !9 counr|os, rom
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und ho|p|ng o pu |no conox ho curron ou|ook or usso pr|cos us
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ors. ln h|s conox, E|roy D|mson, Puu| Mursh und M|ko Suunon o
ho London Bus|noss Schoo| oxum|no wo ory ro|oun |ssuos.
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!982, hoy usk whohor |nosors shou|d now bo ouru| o u|||ng
bonds. Th|s ur|c|o oxum|nos por|ods whon horo huo boon shurp u||s,
or druw-downs, |n goornmon bonds und how |ong hoso huo por-
s|sod. From u cross-usso c|uss po|n o |ow, h|s ur|c|o u|so |nos|-
guos corro|u|ons bowoon bonds und socks und how hoso huo
chungod oor |mo. Thoy |nd hu bond druwdowns ond o bo worso |n
|n|u|onury por|ods.
Tho nox ur|c|o ocusos on ho quos or y|o|d whoro | oxum|nos
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|ncomo-or|onod upprouchos. ln gonoru|, ho uuhors h|gh||gh hu
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Muhows o HOLT, uso our propr|oury HOLT rumowork o quun|y
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G||es Keat|ng Stefano Nate||a
Houd o Rosourch or Pr|uo Houd o O|obu| Equ|y Rosourch,
Bunk|ng und Asso Munugomon lnosmon Bunk|ng
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CREDIT SUISSE GL OBAL INVESTMENT RETURNS YEARBOOK 2 0 1 1 _5
Over the long haul, equities have beaten inf lation,
they have beaten treasury bills, and they have
beaten bonds. And as we show in this Credit
Suisse Global Investment Returns Yearbook, the
same pattern has been repeated in every market
f or which we have long- term data. With 111 years
of returns f or 19 Yearbook countries, representing
almost 90% of global stock market value, we can
be conf ident of the historical superiority of equi-
ties. In the USA, f or example, equities gave an
annualized total return over the 111 years of
6.3% in real terms, f ar ahead of the 1.8% real
return on government bonds
Yet that superiority has been dented by the
striking perf ormance of bonds over intervals that
exceed the investment horizon of most individuals
and institutions. Looking back f rom 2011, bond
investors have enjoyed several decades of out-
standing perf ormance. The Credit Suisse Global
Investment Returns Sourcebook is the companion
volume to this Yearbook. The Sourcebook reports
that f or the USA, over the period f rom the start of
1980 to the end of 2010, the annualized real
(inf lation adjusted) return on government bonds
was 6.0%, broadly matching the 6.3% long- term
perf ormance of equities. Over the preceding 80
years, US government bonds had provided an
annualized real return of only 0.2%.
Similarly, f or the UK, f rom 1980 to 2010 the
annualized real return on government bonds was
6.3%. Over the preceding 80 years, UK govern-
ment bonds had provided an annualized real return
of just 0.5%. While equities have disappointed in
recent times, bonds have exceeded most inves-
tors expectations. Bonds the lower risk asset
have met or exceeded the perf ormance of risky
equities. Af ter such a good run, investors are wary
that bond prices could f all. In this article, we
theref ore examine the extent to which bonds
expose investors to potentially large drawdowns
on their portf olios. We examine the correlation
between stocks and bonds, which underpins the
role of bonds in a balanced portf olio. Finally, with
inf lationary concerns in the ascendancy, we exam-
ine the impact of both unexpected and expected
inf lation on real bond returns.
Ri sk and ret urn
For each of our 19 countries, we plot the realized
equity risk premium, relative to government bonds,
over the entire Yearbook history and f or the sub-
Fear of falling
After a decade with two savage bear markets, investors are wary of equities.
Government bonds have been a bright spot, but capital values could fall. This
article examines how far government bonds can decline, investigates the role of
bonds as a diversifier, shows how the crucial stock- bond correlation has
changed over time, and compares the performance of corporate, long- and mid-
maturity government bonds, and Treasury bills. A global study of government
bonds reveals the pain and potential reward from exposure to inflation risk.
El roy Di mson, Paul Marsh and Mi ke St aunt on, London Business School
period since 2000. These premia are depicted in
Figure 1. In blue, we show the annualized equity
risk premia that were achieved over the last 111
years. In red, we show the annualized risk premia
that were realized over the 11 years f rom the start
of 2000 to the end of 2010 every red bar being
smaller than the long- term premium in blue.
Over the very long term, equities perf ormed
better than bonds, and the blue bars are all posi-
tive with an average premium of 3.8% per annum.
But f rom the start of the new century, equities
were superior to bonds in only f our countries
three of which were resource rich economies. For
15 of the 19 countries, equities underperf ormed
bonds. On average, the realized equity risk pre-
mium versus bonds over 200010 was 3.2% per
year. As is apparent in the country prof iles (see
page 31), government bonds have so f ar tended
to be the asset of choice in the 21st century.
One interpretation of this outcome is that the
reward f or equity investing has disappeared, and
that bonds have a continuing attraction f or inves-
tors. An alternative view is that bonds have be-
come expensive, and that investors should be
concerned about the possibility of capital losses.
This raises the question of how large the losses
can be f rom equities and f rom bonds.
Invest or basophobi a
Basophobia, or f ear of f alling, is an ailment that
of ten af f licts investors. They are concerned about
buying at the top, and then experiencing a dra-
matic f all in the value of their purchase. One way
to express this is to measure the drawdown in
value, relative to a portf olio s running maximum
value or high- water mark. The drawdown is de-
f ined as the dif f erence between the portf olio s
value on a particular date and its high- water mark.
The interval f rom the date of the high- water mark
to breaching the high- water mark again is the
recovery period. The investment is said to be
underwater f rom the date of the high- water mark
to the end of the recovery period.
A crucial question is how deep portf olio draw-
downs can be, and how long it takes to recover
f rom them. To answer this question, we compute
the cumulative percentage decline in real value
f rom an index high to successive subsequent
dates. This indicates just how bad an investor s
experience might have been if the investor had the
misf ortune to buy at the top of a bull market. As
we shall see, although equities have provided a
higher return than bonds, they can experience
deeper drawdowns yet there have also been
long intervals of deep bond drawdowns. All returns
include reinvested dividends and, unless stated to
the contrary, are in real (inf lation adjusted) terms.
Using daily data f rom 1900 to date, we look
f irst at drawdowns f or US equities, the historical
record of which is shown in Figure 2 in blue. Eq-
uity investors have suf f ered large extremes of
perf ormance. Af ter the Wall Street Crash, US
stocks f ell to a trough in July 1932 that was in
real terms 79% below the September 1929 peak;
they did not recover until February 1945. This
deep drawdown and long recovery period, sets
more recent setbacks in context.
From January 1973, stock prices collapsed un-
til, by October 1974, the equity index was down in
nominal terms by 48%, and in real terms by 56%.
It took only 26 months to recover the nominal
high; however, in real terms equities were under-
water until April 1983. Af ter the t ech- bubble
burst in March 2000, equit y prices also col-
Fi gure 2
Drawdown on US equit ies and bonds, real t erms 19002010
Source: Elroy Dimson, Paul Marsh, and Mike Staunton, Triumph of the Optimists; authors updates
- 80%
- 70%
- 60%
- 50%
- 40%
- 30%
- 20%
- 10%
0%
1900 10 20 30 40 50 60 70 80 90 2000 10
Bonds Equities
Fi gure 1
Equit y risk premium versus t o bonds, 19002010 and 200010
Source: Elroy Dimson, Paul Marsh, and Mike Staunton, Triumph of the Optimists; authors updates.
Germany excludes 192223.

3. 8
-3. 2
-8
-6
-4
-2
0
2
4
6
SAf Nor Aus Den Spa NZ Can Swe UK Avg Swi Bel Ir e Ger US Fra Ita Jap Net Fin
Annualized excess return of equities vs bonds (%)
19002010 200010
lapsed and, by October 2002, the real equity
index was down in nominal terms by 48%, and in
real terms by 52%. While the nominal recovery
took only 47 months, in real terms the market
remains underwater to this day. Similarly, during
the 200709 f inancial crisis, real equity values f ell
by 56%, and they have not yet f ully recovered.
Af ter the meltdowns of 197374, 200002
and 200709, investors were lef t with between
44% and 48% of their peak- level real wealth. But
this was still more than twice as much as those
who endured the 1929 Crash. Recent setbacks in
the USA, while severe, were not on the scale of
the 1930s, and equity portf olios were less under-
water. However, it can take a long time f or recov-
ery in real terms even ignoring costs and taxes.
British stock market experience, shown in Fig-
ure 3 in blue, was similar. Whereas we have daily
data starting in 1900 f or the USA, our daily data
f or the UK starts in 1930. Compared to the USA,
the UK suf f ered greater extremes of poor stock
market perf ormance. Af ter October 1936, the
approach and arrival of war led to a real stock
market decline of 59% by June 1940, though
recovery was complete by October 1945.
Bef ore the oil crisis, the equity market had hit a
high in August 1972, but UK equities entered
1975 down f rom that peak by 74% in real terms,
and recovery took till February 1983. The tech-
crash in March 2003 generated a real loss of
49%, which was recovered by October 2006.
Af ter June 2007, the f inancial crisis hit the UK
hard, and by March 2009 equities were down by
47% in real terms; they are still underwater.
Bond drawdowns
The scope f or deep and protracted losses f rom
stocks makes f ixed- income investing look, to
some, like a superior alternative. But how well do
bonds protect an investor s wealth? In Figures 2
and 3, we plot in red the corresponding draw-
downs f or government bonds. For those who are
seeking saf ety of real returns, these charts are
devastating. Historically, bond market drawdowns
have been larger and/ or longer than f or equities.
In the US bond market, there were two major
bear periods. Following a peak in August 1915,
there was an initially slow, and then accelerating,
decline in real bond values until June 1920 by
which date the real bond value had declined by
51%; bonds remained underwater in real terms
until August 1927. That episode was dwarf ed by
the next bear market, which started f rom a peak
on December 1940, f ollowed by a decline in real
value of 67%; the recovery took f rom September
1981 to September 1991. The US bond market s
drawdown, in real terms, lasted f or over 50 years.
The UK had a similar experience. The f irst bond
bear market started in January 1935, and by
September 1939 the real value of bonds had
f allen by 33%; the recovery took until April 1946.
But in October 1946, bonds began to slide again
in real terms, having lost 73% of their value by
December 1974. UK government bonds were
underwater, in real terms, f or 47 years until De-
cember 1993. While bonds appeared less risky in
nominal terms, it is clear that their real value can
be destroyed by inf lation.
Bal anced port f ol i os
Figure 4 presents the drawdown on an illustrative
balanced portf olio of 50% equities and 50%
bonds. The drawdown is plotted f or both the USA
(in blue, upper panel) and UK (in red, lower
Fi gure 3
Drawdown on UK equit ies and bonds, real t erms 19302010
- 80%
- 70%
- 60%
- 50%
- 40%
- 30%
- 20%
- 10%
0%
1930 40 50 60 70 80 90 2000 10
Bonds Equities
Fi gure 4
Drawdown on 50:50 st ock-bond blend, real t erms 19002010
- 50%
- 40%
- 30%
- 20%
- 10%
0%
- 6 0 %
- 5 0 %
- 4 0 %
- 3 0 %
- 2 0 %
- 1 0 %
0 %
1 9 00 1 0 2 0 3 0 4 0 50 6 0 7 0 8 0 9 0 2 00 0 1 0
US bl en d UK b le nd
panel). Individually, equities and bonds have on
several occasions lost more than 70% in real
terms. But since 1900, this 50:50 blend has
never (USA) or virtually never (UK) suf f ered a
decline of over 50%. Furthermore, the duration of
drawdowns is brief er f or the blend portf olio than
f or the supposedly low- risk f ixed income asset.
Measured in local currency adjusted f or inf la-
tion, the long- term annualized real return on US
equities was 6.3% (6.1% in the UK, f rom 1930).
Meanwhile, US government bonds had a real
return of 1.8% (2.1% in the UK, f rom 1930). The
50:50 blend portf olio returned an annualized
4.5% in the US (4.4% in the UK, f rom 1930).
While a 50:50 equity/ bond blend has had a
lower expected return than an all- equity portf olio,
it has also had a lower volatility. Since 1900, the
standard deviation of real equity returns has been
20.3% in the USA and 20.0% in the UK, as com-
pared to bonds which has a standard deviation of
10.2% in the USA and 13.7% in the UK. For the
blend portf olio, the standard deviation was attrac-
tively low: 11.7% in the US and 14.4% in the UK.
There is nothing special about a 50:50 asset
mix and, in reality, investors should diversif y
across more assets than just local stocks and
bonds. However, this example serves to highlight
the risk- reducing potential of a balanced portf olio
of bonds and stocks.
Bonds as a di versi f i er
Why is the downside risk of the blended stock/
bond portf olio lower? There are two reasons. First,
bonds are less volatile than equities. The country
prof iles (page 31 onwards) show that in all 22
Yearbook markets, bonds have had a lower stan-
dard deviation (averaging 12.5% across our 19
countries) than equities (which average 23.4%).
Second, bonds are imperf ectly correlated with
stocks. Figure 5 plots the correlation between
stock and bond returns computed in real terms
over a rolling window of 60 months. The correla-
tions are shown f or both the USA and UK. The
stock- bond correlations as at end- 2010 are nega-
tive: f or the USA a correlation of 0.14, and f or
the UK 0.03.
In contrast to recent experience, the stock-
bond correlation has been positive, although f airly
low, over the very long term. In the USA, using
real returns over the period 19002010, it aver-
aged +0.19 with a range of 0.38 (in January
1960) to +0.67 (in October 1924). In the UK,
using real returns over the period 19302010, it
averaged +0.31 with a range of 0.31 (in May
2007) to +0.74 (in December 1939).
When inf lation accelerated and subsided, f rom
the 1970s to the 1990s, changes in inf lation
expectations drove both stock and bond markets
in tandem. Stock- bond correlations were brief ly
negative around the 1929 Crash and f or a longer
period in the late 1950s and early 1960s. But, in
the turmoil of the 2000s, when bonds became a
desirable saf e- haven asset, the correlation be-
came strongly negative in both countries.
In Figure 6, we display rolling 60- month stock-
bond correlations averaged across the Yearbook s
19 countries. The indices are the MSCI equity and
Citigroup WGBI bond indices (except South Af rica
f or which we use swap rates), starting in 1989 f or
most countries. They are denominated in local
currency and adjusted by local inf lation. Figure 6
provides clear conf irmation that the US and UK
pattern of relatively low stock- bond correlations
af ter the 1990s was prevalent worldwide. The key
Fi gure 5
Rol l i ng st ock-bond correl at i ons: real t erms, 19002010
Source: Elroy Dimson, Paul Marsh, and Mike Staunton, Credit Suisse Global Investment Returns Source-
book 2011, and authors extensions.
- 0.4
- 0.2
0.0
0.2
0.4
0.6
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
United States United Kingdom
Fi gure 6
Gl obal average of rol l i ng st ock-bond correl at i ons
Source: Elroy Dimson, Paul Marsh, and Mike Staunton; MSCI and Citigroup; Antti Ilmanen
- 0.4
- 0.2
0.0
0.2
0.4
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
question is this: Will low correlations persist into
the f uture?
While we cannot predict the f uture, we can
read the tea leaves of history. We theref ore exam-
ine how stock- bond correlations behaved over the
very long term in all 19 Yearbook countries. Our
aim is to see whether the relatively low correla-
tions we have f ound f or the US and UK and f or
other countries more recently have been re-
peated elsewhere.
We theref ore compute stock- bond correlations
f or all 19 Yearbook countries, based on annual
real returns f or the entire 111 years f rom 1900,
and also f or the years f rom 1950 to 2010. These
correlations are shown in Figure 7. They are gen-
erally positive, with an average of +0.24 over the
entire period starting in 1900, and +0.19 over the
period starting in 1950. In Figure 7, we also dis-
play stock- bond correlations based on returns over
60 months to the end of 2010. For every country,
the correlation estimated over the recent period
200610 is lower than the average of the correla-
tions estimated over the longer intervals of 1900
2010 and 19502010.
Consistent with the last observation at the right
of Figure 6, the average of all 19 countries
monthly stock- bond correlations in Figure 7 is
0.19. But even if correlations rise towards the
long- term averages depicted in Figure 7, they will
still be low. With a low correlation to equities,
bonds of f er diversif ication opportunities.
The mat uri t y premi um
Over the horizon spanned by the Yearbook, long-
maturity government bonds provided a superior
return compared to holding Treasury bills. In the
USA, an investment of USD 1 in 1900 in a long
bond index, representing the returns on govern-
ment bonds with an approximate maturity of 20
years, grew by the end of 2010 to a real value of
USD 7.5, an annualized real return of 1.8%. A
comparable investment in US government Treas-
ury bills which typically have a very short- term
maturity of around one month grew to a real
value of USD 2.9, an annualized real return of
1.0%.
These long- term real returns on US bonds and
bills are portrayed in Figure 8. We also show the
real return f rom investing in mid- maturity US gov-
ernment bonds, with an average maturity of f ive
years. Since this mid- maturity bond index starts in
1926, we have set its initial value equal to the
then value of the long- maturity bond index. Over
the 85- year period f rom 1926 to 2010, investors
would have ended up with almost as much f rom
holding mid- maturity as f rom long- maturity bonds.
Finally, we show the perf ormance of corporate
bonds, which grew in real value f rom USD 1 to
USD 15.9, an annualized real return of 2.5%.
The pattern of UK long bond returns is similar.
We measure their perf ormance by UK government
2% consols until 1954, and thereaf ter by a
portf olio of dated bonds with an average maturity
of 20 years. Starting in 1900, investment in this
long bond index of GBP 1 grew by the end of
2010 to a real value of GBP 4.6, an annualized
real return of 1.4%. A comparable investment in
Treasury bills grew to a real value of GBP 3.1,
equivalent to an annualized real return of 1.0%.
More details on long- term returns f or the UK are
provided in the Credit Suisse Global Investment
Returns Sourcebook.
In both the USA and the UK, the history of
bond investment was not a tale of steady pro-
Fi gure 8
Cumul at i ve real ret urn f rom US bonds, 19002010
Source: Elroy Dimson, Paul Marsh, and Mike Staunton Triumph of the Optimists; authors updates, Morn-
ingstar / Ibbotson Associates, Global Financial Data
7.5
2.9
6.8
15.9
0
4
8
12
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
Long- maturity bonds 1.8% per year Tr easur y bills 1.0% per year
Mid-maturity bonds 1.7% per year Corporate bonds 2.5% per year
Fi gure 7
St ock-bond correl at i ons: Vari ous t i me hori zons, 19002010
Source: Elroy Dimson, Paul Marsh, and Mike Staunton, MSC data; Antti Ilmanen
.24
. 19
- .19
- 0.6
- 0.4
- 0.2
0.0
0.2
0.4
Nor Aus Ger Jap Fra Net Den Fin Can Swe US Avg Swi NZ Bel UK Ir e SAf Ita Spa
19002010 19502010 Monthly 200610

gress. As described earlier, there were two bear
markets, the second of which was especially
lengthy, and in real terms, US and UK govern-
ment bonds were below their high- water mark
f rom about half a century. There were also two
strong bull phases. The f irst bull market was one
in which real bond returns were underpinned by
the def lation of the 1930s, while the second was
underpinned by gradual success in conquering the
inf lationary pressures of the 1970s. We have
discussed long- maturity government bonds in the
US and UK, but what about worldwide evidence?
Gl obal bond perf ormance
In the second half of this Yearbook, the Country
Prof iles show that the annualized real bond return
in the 19 countries averaged 1.0%. For our world
bond index, the annualized real (USD) return was
1.6%.
While the USA and UK are broadly in line with
global f inancial history, there is considerable varia-
tion across countries. Six countries Belgium,
Finland, France, Germany, Italy and Japan had
real bond returns over the last 111 years that
were negative. For these countries, we can be
completely sure that realized returns f ell short of
investors expectations. Although bonds have
been less volatile than equities, they have been
hampered by lower average long- run rates of
return. There have consequently been lengthy
periods when bond perf ormance lagged behind
inf lation. As we showed in the drawdown charts,
bonds have theref ore sometimes experienced
prolonged periods of remaining underwater, of f set
by interludes with excellent perf ormance.
As Figure 9 indicates, the two world wars were
generally periods of poor perf ormance f or bond
investors. During World War I, the world bond
index lost 39% of its real value, while World War II
and its af termath were accompanied by a 49%
decline in real terms. Though wars are bad, def la-
tion has been good news f or bond investors: dur-
ing the def lationary period 192633, the 144%
real return on the world bond index was equivalent
to 11.8% per year. Figure 9 depicts some of
these episodes of extreme bond market perf orm-
ance. The worst periods f or bond investors were
episodes of exceptionally high inf lation, as experi-
enced in Germany (192223), Italy and France
(1940s), and the UK (197274).
During 198286, the world bond index rose by
a real 94% (14.2% per year) and, over 1982
2008, it gave a real return of 649% (7.7% per
year). These high returns have arisen f rom a re-
markable decline in interest rates since the inf la-
tionary 1970s.
Int erest rat es and i nf l at i on
The extent to which interest rates have f allen is
highlighted in Figure 10. This graph plots the level
of the short- term interest rate in the UK, linking
together data f or the bank rate, minimum lending
rate, minimum band 1 dealing rate, repo rate and
of f icial bank rate. As we show in the chart, nomi-
nal interest rates have never been as low in the
UK as today not only during the 21st and 20th
centuries, but even in the 19th, 18th and 17th
centuries. These low interest rates ought to be
good news f or borrowers (though, in reality, bor-
rowers f requently f ace loan limits and pay signif i-
cant credit spreads). For bond investors, the de-
cline in interest rates has been good in retrospect,
since bond prices rose. But that means they are
Fi gure 10
Short -t erm nomi nal i nt erest rat es i n t he UK, 16942010
Source: Bank, minimum lending, minimum band 1, repo and off icial bank rates from Bank of England
1694 1750 1800 1850 1900 1950 2010
0
2
4
6
8
10
12
14
%

Fi gure 9
Ext reme real ret urns i n bond market hi st ory, 19002010
Source: Elroy Dimson, Paul Marsh, and Mike Staunton, Credit Suisse Global Investment Returns Sourcebook
2011
144
- 95
- 84
- 50
- 100
649
- 39
- 49
94
- 100
0
100
200
'1418
World
'3948
World
'2633
World
'2223
Ger
'4347
Ita
'4548
Fra
'7274
UK
'8286
World
'822008
World
World wars Def lat ion Inf lat ion and hyperinf lat ion Beat ing inf lat ion Golden era
11.8%
p.a.
14.2%
p.a.
7.7%
p.a.
(Ger:
75%)
(Jap:
99%)
poorer in prospect, since the f orward- looking
return f rom f ixed income securities is now low.
Today s yields on sovereign bonds are small,
regardless of maturity or geography, except f or
countries where credit risk is a concern. Yet, as
we have seen, f ixed income investors can be
exposed to major drawdowns if inf lation and inter-
est rates accelerate ahead of expectations.
Meanwhile, there is reduced scope f or return
enhancement through f urther cuts in interest rates
or unconventional measures such as quantitative
easing. The only exceptions are issuers that are
regarded as a credit risky. Here, there are oppor-
tunities to increase expected returns, although
only by exposing portf olios to corporate or sover-
eign def ault risk.
Inf l at i on reduces bonds saf e-haven st at us
When higher inf lation is a threat, bond yields will
obviously rise and prices will f all. But price f alls
are likely to be greater than can be explained just
f rom the impact of higher expected inf lation on the
real cash f lows f rom bonds. The real yield is also
likely to rise because of three intertwined f actors.
First, when the purchasing power derived f rom
a f ixed- interest investment is uncertain, it loses
some of its attraction as a ref uge f rom f inancial
market volatility. Second, when inf lation is higher
it is typically more volatile, and the required pre-
mium f or exposure to inf lation uncertainty will rise.
And third, when inf lation is high it hurts company
values as well as bond prices, increasing the
stock- bond correlation and reducing the diversif i-
cation benef its f rom bonds. These pressures limit
the saf e- haven attribute of bonds and, at the
same time, increase their beta relative to equities.
Thus during periods of continuing and variable
inf lation, expected bond returns are higher, not
only in nominal terms, but also in real terms. The
yield curve can be expected to slope upwards so
as to provide long- bond investors, who predomi-
nately care about real returns, with a positive term
premium. This premium increases with duration,
as longer bonds f ace greater inf lation uncertainty.
Conversely, during a period when consumer
prices f all, bonds have f avorable investment char-
acteristics. They are the only asset class that
provides a hedge against def lation and they are a
saf e haven during stock market crises. So when
def lation is a concern, government bonds come
into their own. Also, at such times, bonds are
more likely to be a hedge against the equity mar-
ket (see Figures 5 and 6).
Consistent with this story, we have shown that
over recent periods, stock- bond correlations have
been lower than correlations based on long- term,
data (see Figure 7). The expected return f or a
low- or negative- beta asset should ref lect its risk-
reducing attributes. Consequently, as the beta of
government bonds f ell during the 1990s and into
the 2000s, they were re- priced to of f er a smaller
f orward- looking risk premium. Yields declined, and
realized returns were theref ore high.
Looking to the f uture, if bonds retain their saf e-
haven attributes, they can be expected to deliver
low but positive perf ormance in the years ahead.
If , however, higher and uncertain inf lation reap-
pears, then bonds will be perceived as riskier,
yields and expected returns will increase, and
prices will f all. In recent months, as inf lationary
concerns have moved into the ascendancy, we
have already seen a move in this direction.
Inf l at i on ri sk
When inf lation accelerates, bond prices will there-
f ore f all because f uture cash f lows decline in real
terms, while the real yield increases. The rise in
real yields is needed to increase the f orward-
looking real return to a level that attracts investors
to hold these securities. We conf irm this in Figure
11. At each New Year, countries are ranked by
the annual inf lation they will experience over the
year ahead. Note that, while this enables us to
quantif y the impact of inf lation on real bond val-
ues, it is not an implementable strategy, since
year- ahead inf lation is not known in advance.
We assign the 19 Yearbook countries to quin-
tiles that comprise f our countries (three f or the
middle quintile). Each portf olio is allocated equally
to the constituent countries bonds. Income is
reinvested, and at the end of each year, countries
are re- ranked and portf olios rebalanced. Figure
11 reports returns in real USD. The lef tmost bars
in Figure 11 show the annualized real returns f rom
quintiles 1, 3 and 5 over the f ull 111 year period.
The countries with the lowest inf lation perf ormed
best, while bonds in high- inf lation countries un-
derperf ormed. This pattern was evident over all
Fi gure 11
Real ret urns: ranking by concurrent inflation, 19002010
6.4
10.8
4.9
8.5
7.8
3.2
2.0
2.6
5.5
10.9
3.4
7.9
1.7
0.1
-2.6
0 . 2
-2.3
- 0 .4
- 4
- 2
0
2
4
6
8
1 0
19 00 2 01 0 19 00 1 9 24 1 92 5 19 49 1 95 0 19 7 4 1 975 1 99 9 20 00 2 01 0
Lowest inf lat ion count ries Middle inf lat ion count ries Highest inf lat ion count ries
% p.a.
6.4
10.8
4.9
8.5
7.8
3.2
2.0
2.6
5.5
10.9
3.4
7.9
1.7
0.1
-2.6
0 . 2
-2.3
- 0 .4
- 4
- 2
0
2
4
6
8
1 0
19 00 2 01 0 19 00 1 9 24 1 92 5 19 49 1 95 0 19 7 4 1 975 1 99 9 20 00 2 01 0
% p.a.
subperiods of the 20th and 21st centuries, other
than the 11- year period since the year 2000.
With a perf ect year- ahead f orecast of the 19
inf lation rates, this could be a prof itable trading
rule buy the bonds of those countries that are
destined to report the lowest inf lation rates. How-
ever, no investor has access to a crystal ball. The
investor could buy the bonds of countries that
have reported low inf lation f or the preceding year,
but as we show next, that is a quite dif f erent
strategy and it is not a recipe f or investment suc-
cess.
The i nf l at i on premi um
In terms of purchasing power, bonds are riskier
when inf lation is higher and uncertain. During
periods of higher inf lation, government bonds can
theref ore be expected to have a higher expected
real return. Do they on average deliver a higher
real return when inf lation rates are higher? We
look again at the long- term history of the 19
Yearbook countries to address this question.
As bef ore, at each New Year, countries are
ranked by their annual inf lation rate but now we
use inf lation f or the year preceding investment.
We assign the 19 Yearbook countries to quintiles
that comprise f our countries. Each portf olio is
allocated equally to the constituent countries
bonds. Income is reinvested, and at the end of
each year, countries are re- ranked and portf olios
rebalanced. Returns are in real USD.
The lef tmost bars in Figure 12 show the annu-
alized real returns f rom each quintile over the f ull
111 year period. Bonds in the countries with the
highest inf lation rates tended to have higher real
returns over the subsequent year, conf irming that
bonds were priced so as to provide a higher f or-
ward- looking return. This pattern was evident over
all subperiods of the 20
th
and 21st centuries,
other than the f irst quarter- century of the 1900s.
We also f ind that the volatility of real returns in
high- inf lation countries is larger than that of low-
inf lation countries: over the entire period 1900
2010, the standard deviation of real bond returns
in the high- inf lation countries was 17.6%, as
compared to 14.6% in the low- inf lation countries.
The higher long- run real return f rom high- inf lation
countries provided some compensation f or uncer-
tainty about the purchasing power of bonds in the
bond issuer s economy, and the risk of underper-
f orming in terms of USD returns.
Avoi di ng acci dent s
Since the beginning of the 21st century, govern-
ment bonds have achieved excellent perf ormance,
beating equities in most of the 19 countries in the
Yearbook. Over the long term, equities have
beaten f ixed income investments, and the 21st
century has so f ar deviated f rom historical prece-
dent. Bond yields have f allen, and investors are
now concerned about capital losses on their port-
f olios.
We have documented the scale of drawdowns
f rom bond portf olios in the UK and USA, and
compared them to drawdowns f rom equity portf o-
lios. Government bonds have suf f ered two big
bear markets, f ollowed by recoveries. On both
sides of the Atlantic, bonds were underwater in
real terms f or about half a century.
We show that simple domestic diversif ication
between stocks and bonds can reduce downside
risk, although the expected investment perf orm-
ance of a blended bond- plus- equity portf olio is
naturally lower than an all- equity portf olio. The
scope f or diversif ication between bonds and
stocks depends crucially on the correlation be-
tween the returns on these two asset classes. We
report on how the stock- bond correlation has
varied over time. We show that it is typically quite
low, and that f rom the 1990s to the 2000s it
moved, globally, f rom positive to negative.
The bad times f or bond investors have included
times that are inf lationary, and when interest rates
are low and then subsequently rise more than
expected. We present evidence on the extremes
of global bond market perf ormance since 1900,
and on the magnitude of current interest rates
compared to the ultra- long- term historical record.
This motivates us to undertake a cross- country
study of the impact of inf lation on the real (inf la-
tion- adjusted) investment perf ormance of gov-
ernment bonds.
We demonstrate the decimating impact of in-
f lation on contemporaneous bond returns. But we
also show that attempts to avoid these risks, by
Fi gure 12
Real ret urns: ranki ng by pri or-year i nf l at i on, 19002010
2.3
1.6
1.7
5.6
4.6
3.4
2.3
1.9
7.2
7.9
4.0
3.8 3.8
7.2
9.4
- 0.4
0.6
- 1.4
- 2
0
2
4
6
8
19002010 19001924 19251949 19501974 19751999 20002010
% p.a.
investing in the bonds of low- inf lation countries,
may provide lower returns.
An alternative strategy is to buy bonds issued
by governments that have experienced high rates
of inf lation, rebalancing the portf olio annually to
maintain exposure to high- inf lation markets. This
approach is more risky, and has a higher volatility
of returns. While has generated a higher return
over the long term, this may be no more than a
risk premium f or exposure to the bonds issued by
inf lation- prone countries.
Of course, inf lation expectations are not the
sole driver of conventional bond prices, and the
broader supply- demand dynamic is also important.
The supply side includes f actors such as the im-
pact of the def icit, changes in the scale of bond
issuance, and the choice of instrument to issue.
On the demand side, there are regulatory changes
that af f ect investor behavior, like minimum f unding
requirements f or pension f unds and capital re-
quirements f or lif e companies. Nevertheless, over
the long term, the investment perf ormance of
bonds has depended crucially on real interest
rates and the impact of inf lation.
As inf lation receded, interest rates f ell and the
demand f or a saf e haven increased, leading to
outstanding investment perf ormance f rom gov-
ernment bonds. But the golden age of the last 28
years cannot continue indef initely, and we must
expect returns to revert towards the mean. Only a
raging optimist would believe that, given today s
bond yields, the f uture can resemble the more
recent past. It is sheer f antasy to expect bond
perf ormance to match the period since 1982.
Yet expecting bond returns to be lower than in
the golden era is not the same as asserting they
will enter a protracted period of negative perf orm-
ance. A popular view is that bonds are in a bubble,
or that yields, even on long bonds, will go up,
giving rise to capital losses. While this is entirely
possible, the f act that real returns have been
unusually high over several decades does not
mean that in f uture they will be unusually low.
Current bond yields which despite recent rises
remain historically quite low may simply ref lect
what we can expect.
While the long- run return f rom investing in gov-
ernment bonds has been lower than equities, this
is what we should expect, given their lower risk.
And government bonds have unique properties
and an important role in asset allocation. They
continue to provide a saf e haven to investors, a
hedge against def lation, and opportunities f or
portf olio diversif ication.

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In autumn 2010, US 10- year Treasury yields f ell
to 2.4%, just above their post- Lehman crisis level,
which marked their low point in over half a century
(see Figure 1). Shorter rates were lower still. 5-
year Treasury yields dipped below 1%, while cash
yielded close to zero. These historically low rates
were mirrored in most developed countries, except
those where credit risk was a concern.
Although bond yields rose sharply by the year-
end, they were still low by historical standards.
Year- end equity yields were also well below their
historical means, but equities nevertheless still
appeared competitive, relative to bonds, in terms
of income. Over the last 50 years, US bond yields
exceeded equity yields by an average of 3.9%
the so- called reverse yield gap (see Figure 1). In
the depths of the credit crunch, the US yield gap
brief ly turned positive. While now negative again,
it remains low by the standards of the last 50
years as it does in other major world markets.
Many investors view the yield gap as a crude
indicator of the relative attractiveness of equities.
They argue that if equity yields are close to, or
only a little below those on government bonds,
then equities are the more attractive since, unlike
f ixed income bonds, they of f er the prospect of
income growth. Furthermore, by tilting their port-
f olios towards higher- yielding shares and markets,
investors can obtain a prospective yield higher
than that f rom bonds. Moreover, in uncertain
times, tilting towards higher yielders is widely
viewed as saf er. But can it be that simple?
Mi nd t he (yi eld) gap
Setting aside countries whose governments f ace
appreciable credit risk, equity investors should
expect a return premium compared to government
bonds because stocks have higher risk. Equities
provide a current dividend yield plus an expected
growth rate of dividends, while the expected bond
return is the current redemption yield. The yield
gap is theref ore equal to the equity premium ver-
sus bonds minus the expected growth rate in
dividends. Expressing this in real terms, the yield
gap equals the expected equity premium versus
bonds, minus the expected real growth rate in
dividends, minus the expected inf lation rate.
This decomposition of the yield gap into its un-
derlying components helps explain the pattern we
see in Figure 1. We would expect the yield gap to
be lower when the expected inf lation rate is
The quest for yield
Low interest rates on cash and government bonds are causing investors to
seek income elsewhere, especially f rom equities and corporate bonds. While
investors remain nervous about equities, there is a belief that higher- yielding
stocks not only provide enhanced income, but are less risky. This article
examines whether income, per se, should matter. It shows the contribution of
income and dividend growth to long- term returns. It investigates the perf orm-
ance and risks of strategies tilted towards higher yield, both within and across
equity markets. Finally, it looks at the risk and return f rom corporate bonds.
El roy Di mson, Paul Marsh and Mi ke St aunt on, London Business School

higher; to be lower when the expected risk pre-
mium is lower; and to be lower when the expected
growth rate of dividends is higher. Figure 1 shows
that the US yield gap was mostly positive (i.e.
equities yielded more than long bonds) until the
mid- 1950s, while since then it has been mostly
negative. The most obvious driver has been inf la-
tion and inf lationary expectations. From 1900 to
1959, US inf lation averaged 2.1% per year; since
then, it has averaged 4.1%. Year- on- year inf lation
peaked at 15% in 1980, while the reverse yield
gap peaked at over 10% in 1981.
Our decomposition of the yield gap also helps
explain why it turned positive in December 2008,
rising to 1% in the USA at the height of the f inan-
cial crisis. First, inf lationary expectations had f allen
sharply, and there were signif icant def lationary
concerns. Second, expected dividend growth had
been revised downwards. Third, the equity risk
premium had increased. The premium is the re-
ward per unit of risk that investors require to in-
vest in risky equities rather than less risky gov-
ernment bonds. In December 2008, equities had
f allen sharply, making investors poorer and more
risk averse, while risk had greatly increased.
Fortunately, the extreme conditions of the
credit crunch were f airly short- lived, and the yield
gap in most countries has again f allen. Neverthe-
less, Figure 2 shows that by end- 2010, yield gaps
in the world s major markets remained high by the
standards of the last 50 years. The yield gap was
1.6% in the USA, 0.7% in France, 0.5% in
the UK, 0.2% in Germany, and actually positive
in Japan and Switzerland. These yield gaps simply
ref lect the current consensus about market condi-
tions, rather than signaling a buying opportunity
f or stocks. Yet despite this, continuing low inter-
est rates have led many investors to look increas-
ingly to equities and dividends f or income.
Why di vi dends mat t er
From day to day, investors f ocus mostly on price
movements, which is where the action is. In con-
trast, dividends seem slow moving. Indeed, over a
single year, Figure 3 shows that equities are so
volatile that most of an investor s perf ormance is
attributable to share price movements (the blue
bars). Dividend income (the red area plot) adds a
relatively small amount to each year s gain or loss.
On balance over the years, capital gains out-
weigh losses. The blue line plot in Figure 3 shows
that a US equity portf olio, which started in 1900
with an investment of one dollar, would have
ended 2010 valued at USD 217, even without
reinvesting dividends. In nominal terms, this is an
annualized capital gain of 5.0%.
While year- to- year perf ormance is driven by
capital gains, long- term returns are heavily inf lu-
enced by reinvested dividends. The red line plot in
Figure 3 shows that the total return f rom US
equities, including reinvested dividends, grows
cumulatively ever larger than the capital apprecia-
tion, reaching USD 21,766 by the end of 2010,
an annualized return of 9.4%. The terminal wealth
f rom reinvesting income is thus almost 100 times
larger than that achieved f rom capital gains alone.
This ef f ect is not specif ic to the USA, but is
true f or all equity markets. Indeed, the longer the
investment horizon, the more important is dividend
income. For the seriously long- term investor, the
value of a portf olio corresponds closely to the
present value of dividends. The present value of
the (eventual) capital appreciation dwindles greatly
in signif icance.
Fi gure 1
US bond and equi t y yi el ds, 19002010
Source: Elroy Dimson, Paul Marsh and Mike Staunton; Global Financial Data.
3.4
- 1.6
1.7
- 10
- 5
0
5
10
15
1900 10 20 30 40 50 60 70 80 90 2000 10
Yield (%) on 10- year bonds Yield gap (%) Dividend yield (%)

Fi gure 2
Yi el ds and reverse yi el d gap, 19502010
Sources: Elroy Dimson, Paul Marsh and Mike Staunton; Thomson Datastream; Global Financial Data
- 10
- 5
0
5
10
15
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US UK Germany France Japan Switzerland
Minimum (month- end) yield End- 2010 yield Average yield Maximum yield


Di vi dend growt h
Unlike f ixed- income investments, equities of f er
the prospect of dividend growth. Historically, divi-
dends have grown in nominal terms in every Year-
book country. But what matters is real, inf lation-
adjusted growth. Figure 4 shows the Yearbook
countries and world index ranked by their annual-
ized real dividend growth over 19002010 (the
gray bars). Real dividend growth has been lower
than is of ten assumed. Figure 4 shows that 10
out of 19 Yearbook countries recorded negative
real dividend growth since 1900, and only f our
enjoyed real dividend growth above 1% per year.
Real dividends on the world index grew by 0.83%
per year, bolstered by the heavy weighting of the
USA. Dividends, and probably earnings, have
barely outpaced inf lation.
Dividend growth was lower in the turbulent f irst
half of the last century, with real dividends on the
world index f alling by 0.9% per year. Real divi-
dends grew in just three countries: the USA,
Australia, and New Zealand. But f rom 1950 to
2010, real dividends grew everywhere except
New Zealand, and the world index enjoyed f ar
healthier real growth of 2.3% per year. Figure 4
also shows how dividend yields have changed over
the long run. The red bars show the annualized
change in the price/ dividend ratio (the reciprocal
of the yield) f rom 1900 to 2010. Over the last
111 years, price/ dividend ratios have risen (divi-
dend yields have f allen) in 16 of the 19 countries.
The price/ dividend ratio of the world index grew
by 0.48% per year.
Finally, the blue bars in Figure 4 show the
mean dividend yield in each country f rom 1900 to
2010. By def inition, the real annualized equity
return in each country is equal to the sum of the
three bars shown f or that country, i.e. the mean
dividend yield plus the real growth rate in divi-
dends plus the annualized change in the price/
dividend ratio. Dividends have invariably been the
largest component of real returns.
The sense i n whi ch di vi dends are i rrel evant
Dividends are thus a key component of long- run
returns, but what does this mean f or investors? It
would be trite to advise that dividends should be
reinvested and this would be inappropriate f or
investors who need income. It would also be
wrong to conclude f rom the analysis above that
investors should pref er dividends to capital gains
or seek out high- yielding stocks. But there are
two conclusions we can draw. First, investors
should f ocus on the long term and not be too
inf luenced, or daunted, by short- term price f luc-
tuations. Second, dividends are central to stock
valuation.
From the earliest days of f ormal security analy-
sis, dividends have played a central role in valua-
tion. John Burr Williams, the f ather of investment
analysis, wrote the f ollowing stanza in his 1938
classic, The Theory of Investment Value (but bear
in mind that f inancial poetry seldom rhymes):
A cow f or her milk,
A hen f or her eggs,
And a stock by heck
For her dividends.
Williams point remains true today. When ana-
lyzing investments, the key issue is to assess the
company s potential to distribute cash to share-
holders not necessarily today, but over the long
run. The value of a share is simply the discounted
value of its f uture, long- term dividend stream.
Fi gure 3
Impact of dividends, Unit ed St at es, 19002010
Source: Elroy Dimson, Paul Marsh and Mike Staunton; Triumph of the Optimists; authors updates
21,766
217
- 50
- 25
0
25
50
75
1900 10 20 30 40 50 60 70 80 90 2000 10
1
10
100
1000
10000
100000
Annual dividend impact Annual capital gain
US: total return 9.4% per year US: capital gain 5.0% per year
Annual return (%) Cumulative value: 1900 = USD1

Fi gure 4
Component s of equit y ret urns globally, 19002010
Source: Elroy Dimson, Paul Marsh and Mike Staunton
4.1
0.8
0.5
- 3
- 2
- 1
0
1
2
3
4
5
Jap Ita Bel Ger Den Ire Fra Spa Net Nor Swi UK Fin Wld Can SAf Aus NZ US Swe
Mean dividend yield Real dividend growth Change in price/ dividend ratio


Fif ty years ago, Franco Modigliani and Merton
Miller pointed out that, setting aside taxes and
dealing costs, investors should be indif f erent be-
tween dividends and capital gains. They argued
that if investors received too little income f rom
dividends, they could make up the dif f erence by
selling stock. And if dividends exceeded their
needs, they could reinvest them. This insight
helped Merton Miller to win a Nobel Prize.
Tax, of course, matters since dividends are
usually treated as income and stock sales as
capital gains. This, plus f actors such as withhold-
ing taxes, may lead some investors to pref er either
income or capital gains indeed, the latter may
be f avored in many tax jurisdictions. Similarly,
dealing costs matter, as investors with lower cur-
rent income needs may f avor low- yielding shares,
to avoid reinvestment costs; while those with high
income needs may pref er high- yielders, to avoid
selling costs. Thus, while there may be no overall
market pref erence f or dividends versus capital
gains, there will be clienteles of investors that
pref er one rather than the other.
Di vi dend t i l t s
Despite the arguments put f orward by Modigliani
and Miller, a number of US researchers have,
since the 1970s, documented a marked historical
return premium f rom US stocks with an above-
average dividend yield. The most up- to- date
analysis is by Kenneth French of Dartmouth Uni-
versity. Figure 5 shows his most recent data,
covering the perf ormance since 1927 of US
stocks that rank each year in the highest- or low-
est- yielding 30% of dividend- paying companies,
the middle 40%, and stocks that pay no divi-
dends. Non- dividend paying stocks gave a total
return of 8.4% per year, while low- yield stocks
returned 9.1% and high- yielders gave 11.2%.
The longest study of the yield ef f ect by f ar is
our 111 year research f or the UK. Prior to the
start of each year, the 100 largest UK stocks are
ranked by their dividend yield, and divided 50:50
into higher- and lower- yield stocks. The capitaliza-
tion weighted returns on these two portf olios are
calculated over the f ollowing year, and this proce-
dure is repeated each year. Figure 6 shows that
an investment of GBP 1 in the low- yield strategy
at the start of 1900 would have grown to GBP
5,122 by the end of 2010, an annualized return of
8.0%. But the same initial investment allocated to
high- yield stocks would have generated GBP
100,160, which is almost 20 times greater, and
equivalent to an annual return of 10.9% per year.
Figure 7 shows that the yield ef f ect has been
evident in almost every country examined. This
chart covers 21 countries all the Yearbook
countries except South Af rica, plus Austria, Hong
Kong, and Singapore. The underlying portf olio
returns data were again generously provided by
Ken French. For most countries, the period cov-
ered is the 36 years f rom 1975 to 2010, with the
premium based on the highest- and lowest-
yielding 30% of dividend- paying companies. For a
f ew countries, the data starts af ter 1975, while f or
the USA and UK, the yield premia are taken f rom
the much longer studies reported above.
The bars in Figure 7 show the annualized yield
premium, def ined as the geometric dif f erence
between the returns on high- and low- yielders.
The dark blue bars show the premiums over the
longest period available f or each country. In 20 of
the 21 countries, high- yielding stocks outper-
f ormed low- yielders. The exception was New
Fi gure 5
Ret urns on US st ocks by yield, 19272010
Source: Professor Kenneth French, Tuck School of Business, Dartmouth (website)
6,903
3,686
1,424
0
1
10
100
1,000
10,000
27 30 35 40 45 50 55 60 65 70 75 80 85 90 95 00 05 10
High yield 11.2% p.a. Medium yield 10.3% p.a. Low yield 9.1% p.a. Zero yield 8.4% p.a.
0.
853
Fi gure 6
Ret urns on UK st ocks by yield, 19002010
Source: Elroy Dimson, Paul Marsh and Mike Staunton; Triumph of the Optimists; authors updates
100,160
5,122
- 20
- 10
0
10
20
1900 10 20 30 40 50 60 70 80 90 2000 10
1
10
100
1000
10000
100000
Rolling 5- year annualized yield premium Annual yield premium
High yield 10.9% per year Low yield 8.0% per year
Annual return (%) Cumulative value: 1900 = GBP1
100,160

Zealand, which is a very small market, where the
analysis was based on a sample of just 20 stocks.
In most other countries, the yield premium was
appreciable, except in Denmark and Ireland, two
other small markets, where it was less than 1%
per year. Across all 21 countries, the average
premium was a striking 4.4% per year. The light
blue bars in Figure 7 show the yield premium over
the 21st century to date, namely, the 11 years
since the start of 2000. Over this period, the
premium was positive in 19 of the 21 countries,
and averaged a staggering 9.1%, more than twice
the level of the longer- term period reported above.
This period embraces the dot- com bust, when
technology, media and telecommunications stocks
mostly zero- or low- yielders tumbled f rom
their dizzy heights as investors re- engaged in
stocks with strong f undamentals, including divi-
dends. But this period also spans the credit and
f inancial crisis. This helps explain why Ireland and
Belgium experienced a negative yield premium.
Both markets were heavily weighted towards
banks which, while previously high yielding, sub-
sequently experienced very poor perf ormance.
Expl anat i ons f or t he yi el d premi um
The yield premium is now widely viewed as a
manif estation of the value ef f ect. Value stocks are
those that sell f or relatively low multiples of earn-
ings, book value, dividends or other f undamental
variables. In the context of yield, value stocks or
high- yielders may be mature businesses, or else
dividend payers with a depressed share price that
ref lects recent or anticipated setbacks.
Growth stocks, in contrast, of ten pay low or no
dividends, since the companies wish to reinvest in
f uture growth. They sell on relatively high valuation
ratios, because their stock prices anticipate cash
f lows (and dividends) that are expected to grow.
While many studies document the yield ef f ect,
even more show that value stocks have, over the
long run, outperf ormed growth stocks f or a
review, see our companion Sourcebook.
Why have high- yielders outperf ormed low- and
zero- yielders? There are f our possibilities. First, it
may simply be by chance and hence unlikely to
recur. But this is hard to sustain, as while there
can be lengthy periods when the ef f ect f ails to
hold, it has nevertheless proved remarkably resil-
ient both over the long run and across countries.
A second possibility is that we are observing a
tax ef f ect, since many countries tax systems have
f avored capital gains, perhaps causing growth
stocks to sell at a premium. The impact of tax is
controversial, but tax alone cannot explain the
large premium. Furthermore, in the UK, there was
a yield premium pre- 1914, when income tax was
just 6%. Also, if tax were the major f actor, alter-
native def initions of value and growth stocks
would work f ar less well than dividend yield as an
indicator of high or low subsequent perf ormance.
We have analyzed the most commonly used alter-
native measure, book- to- market, based on the
same 21 markets over the identical time periods,
and f ound that it perf orms almost as well as yield.
A third possibility is that investors become en-
thused about companies with good prospects, and
bid the prices up to unrealistic levels, so growth
stocks sell at a premium to f undamental value.
Evidence f or this was provided in 2009 by Rob
Arnott, Feif ei Li, and Katrina Sherrerd in a study
entitled Clairvoyant Value and the Value Ef f ect
(The Journal of Portf olio Management, 35: 12
26). They analyzed the constituents of the S&P
500 in the mid 1950s, comparing the stock prices
at the time with what they termed clairvoyance
value. This was the price investors should have
paid if they had then had perf ect f oresight about
all f uture dividends and distributions. Arnott classi-
f ied growth stocks as those selling at a premium,
i.e. on a lower dividend yield or at a higher price-
to- earnings, price- to- book or price- to- sales.
Arnott and his colleagues f ound that the market
had correctly identif ied the growth stocks, in that
they did indeed exhibit superior f uture growth.
However, they also concluded that investors had
overpaid f or this growth, by up to twice as much
as was subsequently justif ied by the actual divi-
dends and distributions to shareholders.
The f inal possibility is that the outperf ormance
of value stocks is simply a reward f or their greater
risk. Indeed, hard- line believers in market ef f i-
ciency argue that, whenever we see persistent
anomalies, risk is the prime suspect. Since value
stocks are of ten distressed companies, the risk
argument seems plausible. This could also explain
Arnott s f indings if the discount rates used to
compute clairvoyance value had f ailed to cater
adequately f or dif f erences in risk. But are high-
yielders really riskier than low- yielders?
Fi gure 7
The yield ef f ect around t he world
Sources: Elroy Dimson, Paul Marsh and Mike Staunton analysis using style data from Prof essor Ken French,
Tuck School of Business, Dartmouth (website and private correspondence) and Dimensional Fund Advisors
- 5
0
5
10
15
NZ Den Ire US Swi Bel Ita UK Sin Ger Fin Avg Can HK Aus Net Nor Spa Swe Jap Fra Aut
Longer term Since 2000
Yield premium (%)
=
=
=

Ri sk and ret urn f rom hi gh-yi el d st rat egi es
The key question, theref ore, is whether yield- tilt
strategies lead to higher risk. If they do, the yield
premiums reported in Figure 7 could just be risk
premiums.
Many investors would f ind this counterintuitive,
believing instead that high- yielding stocks not only
provide enhanced income, but are less risky. This
belief may stem f rom the view that a bird in the
hand (a dividend in the bank) is more secure than
two in the bush (f uture returns). If so, this ref lects
a misunderstanding. To see the f allacy, we need
to hold constant the investor s desired holding in
stocks. To maintain this exposure, investors will
need to reinvest their dividends, but once rein-
vested, the f unds are again exposed to equity risk.
While cash is certainly saf er than stocks, this
should have been f actored in when deciding on
the desired exposure to equities in the f irst place.
Investors may also perceive high- yielding
stocks to be lower risk because of sector mem-
bership. Utilities tend to have higher yields and are
also generally of lower risk. But investors may well
once have thought the same about bank shares.
Furthermore, many high- yielding stocks are invol-
untary high yielders. They have acquired their
high yield because their stock price has f allen.
Such companies may be struggling or distressed,
and their f uture dividend may be f ar f rom assured.
To establish whether high- yield strategies are
higher or lower risk, we theref ore need to analyze
the data. For each of the 21 countries repre-
sented in Figure 7, we estimate the risks and risk-
to- reward ratios f rom investing in higher- yielders
(the highest yielding 30% of dividend payers),
lower- yielders (the lowest yielding 30%), zero
yielders, and the overall market. Our measure of
the market is provided by the MSCI country indi-
ces, since the data that we are using are based
on each country s MSCI universe. For the USA,
where we use Ken French s much longer series
starting in 1926, we use the DMS US index f or
the market.
For each of the f our investment strategies,
Figure 8 shows the average values f or the 21
countries of the standard deviation of returns (lef t-
hand panel), betas (middle panel) and Sharpe
ratios (right- hand panel). Looking f irst at the lef t-
hand panel, there is clearly no evidence that
higher- yield strategies are more volatile. On the
contrary, the standard deviation of returns on the
lower and zero yielders were both larger than on
the higher- yielding stocks.
The least volatile of the f our strategies is an in-
vestment in the market, i.e. an index f und holding
in each country. This is to be expected, as volatil-
ity is reduced by diversif ication, and the country
index is f ar better diversif ied than the other strate-
gies, which at most embrace 30% of the stocks in
the market. What is more surprising is that the
average standard deviation of returns f rom invest-
Fi gure 8
Risk and ret urn f rom alt ernat ive yield st rat egies
Sources: Elroy Dimson, Paul Marsh and Mike Staunton analysis using style data from Prof essor Ken
French, Tuck School of Business, Dartmouth, Dimensional Fund Advisors, MSCI and Thomson Reuters
D
22.6
24.0
33.9
21.4
0.42
0.89
0.23
0.98
0.15
1.04
0.30
1.00
Standard deviation (% p.a.) Beta Sharpe ratio
Higher yield Lower yield Zero yield Total country
Averages across 21 countries
Fi gure 9
Sharpe rat ios f rom alt ernat ive yield st rat egies
Sources: Elroy Dimson, Paul Marsh and Mike Staunton analysis using style data from Prof essor Ken
French, Tuck School of Business, Dartmouth, Dimensional Fund Advisors, MSCI and Thomson Reuters
0.0
0.2
0.4
0.6
Ita Spa Jap Avg US Sin Ger Swi UK Net Fra Aus Can Swe HK
Zero yield Lower yield Total country Higher yield
Sharpe ratios


ing in high- yielders (22.6%) is only marginally
higher than that f rom an index f und (21.4%).
Beta measures systematic risk, or the contribu-
tion to the risk of a diversif ied portf olio. The center
panel of Figure 8 shows that the higher- yield
strategy not only had a lower average beta (0.89)
than both the lower- and zero- yield strategies, but
it also had a lower average beta than an invest-
ment in the market (1.0 by def inition).
Finally, the right- hand panel of Figure 8 shows
the historical average Sharpe ratios. The Sharpe
ratio is def ined as the average historical excess
return (the return over and above the risk f ree or
Treasury bill return) divided by the historical volatil-
ity of excess returns. It thus measures the reward
per unit of volatility. The Sharpe ratio of the
higher- yield strategy (0.42) was almost twice that
of the lower- yield strategy, and almost treble that
of the zero- yield strategy. It was also appreciably
higher than the average Sharpe ratio achieved by
investing in the country index f unds.
Figure 9 shows the Sharpe ratios f or the larger
countries in the sample (the smaller country re-
sults paint a similar picture, but are noisier due
to less diversif ied portf olios). It shows that, in
terms of reward f or risk, the higher- yield strategy
beat the lower- and zero- yield strategies in every
country. It also dominated an index f und invest-
ment in every country except Switzerland, where it
was a close runner- up.
It is theref ore hard to explain the superior per-
f ormance of yield- tilt strategies in terms of risk, at
least as conventionally def ined. Indeed, when
growth and value stocks are def ined based on
dividend yield, it is the value stocks that have the
lower volatility and beta.
Count ry yi el d t i l t s
Higher- yielding stocks have outperf ormed lower-
yielders, so perhaps higher- yielding markets have
also outperf ormed lower- yielders. We investigate
this by examining the 19 Yearbook countries over
111 years. At each New Year, countries are
ranked by their dividend yield at the old year- end.
We assign countries to quintiles, each comprising
f our countries, except the middle quintile which
contains three. Each quintile portf olio has an equal
amount invested in each country, and all income is
reinvested. Portf olios are held f or one year. We
then re- rank the countries and rebalance the
portf olios, repeating the process annually.
The lef tmost set of bars in Figure 10 shows the
annualized returns f rom the quintiles over the f ull
111- year period. There is a perf ect ranking by
prior yield and the dif f erences between quintiles
are large. An investment of one dollar in the low-
est- yielding countries at the start of 1900 would
have grown to USD 370 by the end of 2010, an
annualized return of 5.5%. But the same initial
investment allocated to the highest- yielding coun-
tries would have grown to an end- 2010 value of
more than USD 1,000,000 some 2,700 times
as much, and equivalent to an annual return of
13.4% per year.
These f igures are bef ore tax and transaction
costs, but the perf ormance gap is too big to be
attributable to tax. The returns shown in Figure 10
are measured in US dollars f rom the perspective
of a US- based global investor. However, the pat-
tern would look the same f rom the perspective of
a global investor f rom any other country. The
returns would just need to be multiplied by the
appropriate common currency scale f actor (pub-
lished in the Sourcebook).
The remaining f ive sets of bars in Figure 10
show the returns over the f our quarter- century
periods making up the 20th century as well as the
returns over the 21st century to date. Over all of
these subperiods, the high- yielding countries
outperf ormed the low- yielding countries by an
appreciable margin. The results are not theref ore
period- specif ic. Nor are they attributable to risk.
The returns f rom investing in the lowest- yielding
countries were slightly more volatile than investing
in the highest- yielders; the betas against the 19-
country world index were approximately the same;
and the Sharpe ratio was 0.72 f or the portf olio of
highest- yielding countries versus just 0.35 f or the
lowest yielders. Clearly, this multi- country trading
rule based on prior yield would have generated
signif icant prof its at no higher risk.

Fi gure 10
Ret urns f rom select ing market s by yield
Sources: Elroy Dimson, Paul Marsh and Mike Staunton
- 5
0
5
10
15
19002010 190024 192549 195074 197599 20002010
Lowest yield Lower yield Middling yield Higher yield Highest yield
Return (% p.a.)


Corporat e bonds and t he quest f or i ncome
Equities are not the only income- bearing security
issued by corporations. Companies also issue
pref erence stock, and more importantly, corporate
bonds. Recently, low interest rates, coupled with
continued restraints on bank lending, have led to a
f lood of corporate bond issues. Similarly, the
higher coupons promised f rom corporate, rather
than sovereign, bonds have proved tempting to
investors who are on the quest f or income.
For corporate bonds, the promised yield can
appear misleadingly high because it is predicated
on the assumption that all the cash f lows f rom the
bond the coupon and repayments will be paid
on time, with no def aults. Corporate bonds are
subject to credit risk, which ref ers to the probabil-
ity of , and potential loss arising f rom, a credit
event such as def aulting on scheduled payments,
f iling f or bankruptcy, restructuring, or a change in
credit rating.
Historically, the promised yield on US bonds
rated by Moody s as Aaa (the highest quality
bonds issued only by blue chip companies) has
been 0.7% higher than on US Treasuries. Baa
bonds, the lowest grade bonds deemed by
Moody s still to be investment grade, and which
they judge to be moderate credit risk have had a
yield spread of 1.9% above Treasuries. But the
key question f or investors is not what the prom-
ised yields have been, but what returns investors
have really achieved.
To answer this question, we look at the long-
run evidence. We have to rely here on the US
experience, as this is the only country f or which
there is good quality, long- run data. Elsewhere,
consistent, reliable corporate bond data has been
available only since the 1990s, and f or some
countries even later, and this f ails to qualif y as
long run by the standards of the Yearbook.
Figure 8 of the companion article, Fear of Fal-
ling, showed that the long- run return on the high-
est grade US corporate bonds over the 111 years
f rom 1900 to 2010 was 2.52% per year, which
was 0.68% per year more than on US Treasuries.
This is remarkably close to the promised yield
spread on Aaa bonds, which was 0.70% above
Treasuries.
It is interesting to see whether this return ex-
perience is consistent with def ault rates. The red
line plot in Figure 11 shows the def ault rate over
time on investment grade bonds. This has aver-
aged just 0.15%. Furthermore, the actual def ault
losses are smaller than the def ault rates. Annual
losses can be estimated by multiplying the def ault
rate by one minus the recovery rate, and the latter
has averaged around 40% over time. The average
loss f rom def ault on investment grade bonds has
thus been just 0.09% per annum.
Naturally, the def ault rates on non- investment
grade corporate bonds have been higher. The light
blue line plot in Figure 11 shows the def ault rates
on all rated bonds, including speculative grade or
high- yield bonds, i.e., those rated below Baa.
Here, the def ault rate has averaged 1.14% per
year, while f or high- yield bonds, the average was
2.8%.
Figure 11 shows that there are several spikes
in def ault rates, all coinciding with a recession.
Def ault rates were highest f ollowing the Wall
Street Crash and during the Great Depression,
with the blue line plot in Figure 11 hitting an of f -
the- scale 8.4% in 1933, while high- yield bonds
had a def ault rate that year of 15.4%. The second
worst episode f or def ault rates f ollowed the recent
credit crisis and, in 2009, the def ault rate on all
rated bonds was 5.4%, while that on high- yield
bonds was 13%.
Given the low def ault rates shown in Figure 11
on investment grade bonds, the long- run return
premium of 0.68% per year f or high grade Aaa
rated corporate bonds which would have had
even lower def ault rates seems puzzlingly high.
Fi gure 11
Corporat e bond spreads, def ault rat es and equit y volat ilit y
Sources: Elroy Dimson, Paul Marsh and Mike Staunton, Antti Ilmanen Expected Returns (Wiley, 2011),
Moody s, Bloomberg, Barclays Capital, Global Financial Data
0
2
4
6
1919 1930 1940 1950 1960 1970 1980 1990 2000 2010
0
25
50
75
Volatility of US equities (% p.a.) Def ault rates: all rated (%)
Baa- Aaa spread (%) Def ault rates: investment grade (%)
Credit spreads and def ault rates (%) Volatility (% p.a.)

Part of this credit premium is undoubtedly a risk
premium, but given that the risk has generally
been low, it seems likely that other f actors are at
work. For example, corporate bonds are typically
much less liquid than Treasuries, so part of the
credit premium may be compensation f or illiquidity.
Sensible investors will, of course, hold a diver-
sif ied portf olio of corporate bonds, and will thereby
eliminate much of the idiosyncratic risk associated
with corporate bond credit risk. This raises the
question of why corporate bond holders should
expect any risk premium at all. The reason is that
in addition to idiosyncratic risk, corporate bonds
also have market risk (i.e. positive betas) because,
as we have seen f rom Figure 11, def ault is more
likely to occur in recessions when all businesses
are doing poorly.
Figure 11 shows that there is a high correlation
between credit spreads (the dark blue line plot
shows the spread between Baa and Aaa yields)
and US equity market volatility (the grey shaded
area), providing f urther evidence that corporate
bonds f ace considerable market risk. But there is
asymmetry here, with corporate bonds f acing
appreciable tail risk. While relatively saf e f or most
of the time, corporate bonds are highly exposed to
the risk of severe recessions.
Yi el ding t o caut i on
In this article, we have documented the impor-
tance of dividends to investors. We have shown
that, historically, investment strategies tilted to-
wards higher- yielding stocks have generally
proved prof itable. Further, we have shown that an
equity investment strategy tilted towards higher-
yielding markets would have paid of f handsomely.
These f indings have been robust over long pe-
riods and across most countries. While higher risk
would seem an obvious explanation, our research
indicates that portf olios of higher- yielding stocks
(and countries) have actually proved less risky
than an equivalent investment in lower- yielding
growth stocks.
Some cautionary notes are clearly in order.
First, the strategies we have described require a
rigorous rebalancing regime. The resultant portf o-
lios can then of ten appear unappetizing. High-
yield is f requently synonymous with challenged,
troubled or even distressed. It can require courage
to invest in such stocks (and markets). If things go
wrong, as they of ten do, and surely will with at
least some of the portf olio stocks, it is harder to
def end having made such investments. More
popular growth stock stories are easier to justif y.
Second, as with all investment styles, there can
be extended periods when the yield premium goes
into reverse and low- yielders outperf orm. The dark
shaded area in Figure 6 on page 18 shows the
annualized, rolling f ive- year yield premium in the
UK over the last 111 years. It reveals that there
have been extended periods when even the rolling
f ive- year premium has remained negative. These
include the early 1980s, much of the 1990s, and
the present time.
At such times, high- yield investors have needed
to remind themselves that no investment style
remains out of f ashion indef initely. But such peri-
ods can be long enough to severely try the pa-
tience even of those whom we would normally
regard as long- term investors.
Third, we should always be cautious of any
phenomenon when we do not f ully understand its
causes. Perhaps part of the historical yield pre-
mium has arisen f rom taxation. If so, tax systems
today are more neutral between income and capi-
tal gains than was the case in the past. Thus
f uture yield ef f ects may be more muted. While we
have seen that the yield premium is not related to
risk as conventionally def ined, perhaps there is
some dimension of risk that we are missing. If so,
it may reveal itself in an unwelcome way to high-
yield investors of the f uture.
The yield premium across markets may ref lect
historical periods when countries were not inte-
grated internationally, and when market rotation
was not f easible f or the majority of investors. An
investor who chases markets that of f er a high
dividend yield may also be more exposed to politi-
cal risks and an inability to access assets than an
investor who diversif ies globally. The transaction
costs and f ees f or a globally rotated equity portf o-
lio are also larger than f or an international buy-
and- hold strategy.
Many believe that the yield ef f ect is driven by
behavioral f actors, and the tendency of investors
to f all in love with, and overpay f or growth. If so,
then maybe, just maybe, investors will one day
learn their lesson and stop rising to the bait of
growth.

P
H
O
T
O
.

I
S
T
O
C
K
P
H
O
T
O

This article complements f indings presented in the
Global Investment Returns Yearbook and Source-
book by presenting market- implied returns. The
HOLT f ramework was used to calculate the f or-
ward- looking real cost of capital, which we term
the HOLT discount rate. Historical f orward-
looking results are presented f or US industrials
that indicate that, under certain assumptions, the
real cost of capital and its corresponding ERP
appear to f luctuate signif icantly. We use the re-
sults to identif y risk regimes and comment on
interesting periods. We identif y key drivers to
explain the real cost of capital, which should prove
benef icial in discussions aimed at understanding
the f uture direction of this discount rate.
Finally, we conclude by showing present dis-
count rates f or a number of countries and com-
ment on their market expectations. For instance,
developing and resource- rich markets have opti-
mistic expectations embedded in their equity
prices and trade at lower implied returns than their
developed counterparts. Investors might ask
whether they are being properly compensated f or
the risk they are taking in developing markets.
This paper provides a practical means of assess-
ing risk and its corresponding return, which can be
used in making equity allocation decisions.
What i s t he HOLT di scount rat e?
The HOLT market- implied discount rate is a real
cost of capital solved by equating the market value
of equity and debt to the discounted value of
f uture Free Cash Flow (FCF) generated by
HOLT s algorithmic f orecasts, a process similar to
calculating a yield- to- maturity on a bond. The
relationship is diagrammed as f ollows:

Enterprise Value
FCF
i
(1 DR)
i
i 1
N
Forecast
Given
Solve
Enterprise Value
FCF
i
(1 DR)
i
i 1
N
Forecast
Given
Solve

HOLT uses consensus analyst estimates and
its proprietary f ade algorithms to f orecast f uture
asset growth and prof itability, which provide the
necessary ingredients to estimate a f irm' s f uture
f ree cash f low. This calculation is perf ormed on a
Market-implied returns:
Past and present
Estimates of the cost of equity and its equity risk premium (ERP) are based on
historical equity returns and highly dependent on the period studied. The long
history of the Global Investment Returns Yearbook is an outstanding resource
for understanding this time dependency and how it has behaved in various coun-
tries. For example, the country profiles in the Yearbook reveal that the premium
earned over the past decade in many developing countries has far exceeded that
of their developed counterparts. Will this be the case going forward? Spot, for-
ward- looking estimates of market- implied returns coupled with long- term
benchmarks make excellent additions to the toolkit of fund managers and risk
managers, so they can look ahead with a sense of historical balance.
Davi d Hol l and and Bryant Mat t hews, Credit Suisse HOLT

weekly basis f or various countries and regions.
Once company- specif ic market- implied discount
rates are determined, regression is used to de-
termine the average f orward- looking expected
cost of capital. This f orward- looking proxy may
dif f er f rom the historical asset return series pro-
vided in the Yearbook and Sourcebook since it is
dependent on a f orecast of cash f lows, a chal-
lenging task indeed, and naturally susceptible to
f orecasting errors.
The vital link which lends credibility to this exer-
cise, however, is not the basis of the near- term
cash f low estimates, which are derived f rom con-
sensus analyst earnings expectations, but rather
the application of mean- reverting, empirical f ade
rates to the prof itability (CFROI) and growth f ore-
casts. The use of empirical f ade rates provides a
compelling case- study since it synthesizes invalu-
able historical data with the contemporaneous
views of analysts and investors. When analyst
and/ or investor expectations become overly buoy-
ant or pessimistic, the empirical f ade f ramework
guides the f orecast back within the bounds of
normalcy. The resulting cost of capital is crucially
sensitive, theref ore, to periods of euphoria and
despair, providing a powerf ul signal during these
moments f or investors who place f aith in mean
reversion. The results in this paper are enterprise
value- weighted discount rates f or industrial f irms,
i.e., non- f inancials, in each country or region
studied.
1

Hi st ori cal US market -i mpl i ed di scount rat e
We ve calculated the weighted- average real dis-
count rate f or US industrial f irms back to 1950
using the HOLT f ramework. Monthly results were
calculated as of 1975. A high discount rate is
indicative of a risk- averse market where investors
demand more return on their capital due to f ears
about the f uture. Extraordinarily high discount
rates indicate panic and excessive f ear. A low
discount rate is symptomatic of a market with a
greedy risk appetite. Extraordinarily low discount
rates indicate euphoria and excessive greed. The
results can be seen in Figure1.
The f irst thing to note is that the market- implied
discount rate rarely rests at its median of 5.8%.
The market veers between states of greed and
panic, or, in today s parlance, risk on and risk
of f . To give a sense f or dif f erent risk regimes, we
divided the chart into quartiles. The top quartile
sits at 7.1% and indicates a super- chilled risk-
averse market. The bottom quartile sits at 5.1%
and yields below it are indicative of an overheated,
risk- hungry market. These states are illustrated in
Figure 2.
From 1970 to 1985, except f or a brief respite
in the mid- 1970s, the chart indicates that the US
real discount rate was marooned above 7%.
Ronald Reagan spoke of the days of malaise
when running f or the US presidency it was more
like a decade and a half of malaise. Matters were
f lipped on the head in the 1990s. Corporate prof -
itability improved dramatically and risk appetite
swelled, with the discount rate f alling f rom 6.4%
in January 1990 to a low yield of 2.5% at the
peak of the Tech Bubble in early 2000.

1
Please contact the HOLT team at Credit Suisse f or more
details about the HOLT framework and the discount rate calcula-
tion. If you would like to study the CFROI framework and its
mechanics, please see Beyond Earnings: A User s Guide to
Excess Return Models and the HOLT CFROI Framework" by
David Holland and Tom Larsen.
Fi gure 2
Discount rat e t hermomet er
Source: Credit Suisse HOLT
Overheat ed market: US DR < 5. 1%
Neutral market: US DR = 5.8%
Super-chilled market: US DR > 7.1%
Overheat ed market: US DR < 5. 1%
Neutral market: US DR = 5.8%
Super-chilled market: US DR > 7.1%

Fi gure 1
Time series of market -derived discount rat es USA
Source: Credit Suisse HOLT, 17 January 2011
Jan 1950 - Jan 2011
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(
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USA DR 25%il e Medi an 75%il e
Current DR: 5.1 25th perc ent ile: 5. 1 Medi an: 5. 8 75th percentil e: 7.1
Jan 1950 - Jan 2011
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(
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USA DR 25%il e Medi an 75%il e
Current DR: 5.1 25th perc ent ile: 5. 1 Medi an: 5. 8 75th percentil e: 7.1


The US discount rate remained below 5% f rom
1996 until 2008. Af ter Lehman Brothers col-
lapsed in September 2008, the US discount rate
rocketed to a bearish 7.8%. At the time, many
investors were of the view that the discount rate
would remain elevated f or years to come. In f act,
risk appetite returned with hibernating hunger.
Today, the US discount rate is 5.1%.
The HOLT discount rate is usef ul as a quantita-
tive gauge of the market' s risk appetite. Dis-
agreement about its level and implicit signal
should be welcomed because it can lead to a
healthy debate about f uture projections within a
well- def ined f ramework. Will f uture prof itability
and growth really be brighter in times of blue- sky
optimism, or will the world really be so dark in
times of pessimism? The signal is only as good as
the f orecast assumptions. Extreme bouts of opti-
mism and pessimism generally indicate a loss of
f aith in mean reversion.
By knowing the discount rate DR, the market
leverage xD and estimating the corporate cost of
debt rD, we can estimate the market- implied ERP
via these equations:

DR = xDrD + (1 xD)rE

rE = rf + ERP

The risk- f ree rate is denoted by rf and the mar-
ket- implied cost of equity by rE. We use the 10-
year Treasury bond as a proxy f or the risk- f ree
rate. Please note that there is no tax shield term
in the discount rate equation due to the f act that
HOLT captures tax shields in its cash f low calcu-
lation. Our estimate of the market- implied ERP is
shown in Figure 3.
Again, we have divided the chart into quartiles
to give an indication of dif f erent risk regimes.
Readers should remember that the ERP at each
point in time is f orward- looking: risk hungry mar-
kets will have a low ERP and risk- averse markets
will have a high ERP. Since 1960, the median
ERP f or the US has been 4%, which is in line with
the long- term f indings of the Yearbook, i.e., 4.4%
is the premium f or the US equities versus bonds
over the past 111 years.
The market- implied ERP varies signif icantly. It
dipped below 0% during the Tech Bubble, indicat-
ing that risk appetite was overzealous. At the peak
of the Credit Bubble in the Noughties, the ERP
sat at 2% or less, again indicating a ravenous
appetite f or risk. The ERP estimate over the past
year has been attractive in large part due to the
low real yields of US Treasuries. We ve seen the
bond yield increase since November due to
greater conf idence in a global recovery. This in-
crease has put a squeeze on the US ERP and will
take the shine of f equities if it continues to climb
to its norm. Today s US ERP estimate has
dropped to 5.1%.
Readers with an eye f or contradiction might be
asking the question, How do you reconcile the
sell signal of Figure 1 with the buy signal of Figure
3? Times are anything but ordinary, and we see
this argument occurring in today' s f inancial press.
Analysts looking at long- term valuation metrics
such as Robert Shiller s CAPE generally ref er to
today' s US stock market as expensive. Those who
f ocus on yields relative to Treasuries label the US
stock market attractive. Our results agree with
both f indings, i.e. the discount rate signal (Figure
1) indicates that equities are expensive relative to
their long- term history, while the ERP is attractive
(Figure 3). We would caution bullish investors that
the risk premium will only stay high so long as
Treasury yields remain low. A robust global recov-
ery would stoke inf lation and long- term Treasury
yields. This is not to say that markets will not run
f urther; the charts show that risk appetite is f ar
f rom outright euphoria. If anything, our results
indicate that markets are as much psychological
and irrational as they are f undamental and ra-
tional, so good news can translate into positive
market momentum leading to higher share prices,
which are ref lected in lower discount rates.
Di scount rat e dri ver model
We have seen that the discount rate is a powerf ul
quantitative signal, especially in times of euphoria
and despair. This prompts the question, can it be
explained and possibly predicted? In this section,
we identif y explanatory f actors and generate a set
of questions investors should ask themselves.
Fi gure 3
Market -implied equit y risk premium USA
Jan 1960 - Jan 2011
-4%
-2%
0%
2%
4%
6%
8%
10%
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Equity risk premium 25%ile Median 75%ile
Current ERP: 5. 1 25th percentile: 2.4 Median: 4. 0 75th percent ile: 5. 4
Jan 1960 - Jan 2011
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Equity risk premium 25%ile Median 75%ile
Current ERP: 5. 1 25th percentile: 2.4 Median: 4. 0 75th percent ile: 5. 4


Investors required rate of return is inf luenced by
historical and current events, based on the as-
sumption that the f uture will in some sense be
similar to the past. Expectations of f uture out-
comes also drive risk concerns. HOLT s discount
rate can be decomposed into key economic driv-
ers to highlight how the risk premium has evolved
historically, and which f actors are contributing
most at any given point in time.
Intuitively, investors demand a rate of return on
equities at least as much as the risk- f ree rate. In
f act, a premium is required f or investing in less-
saf e equities over Treasuries. The f irst two statis-
tically signif icant discount rate drivers are the real
risk- f ree rate and the spread of BBB credit over
the risk- f ree rate.
Investor tax rates also inf luence the cost of
capital as they diminish investors af ter- tax return.
Capital gains and dividends tax rates tested as
signif icant drivers, and could drive the discount
rate higher if governments chasing tax revenue
punish investors. Volatility creates uncertainty,
which f eeds into a higher cost of capital. We
f ound that the industrial production volatility
proved to be a signif icant driver of the discount
rate. Expectations of higher inf lation f uel higher
ef f ective real tax rates f or investors. Conse-
quently, inf lation is also a signif icant discount rate
driver. The ef f ect of each driver over time can be
seen in Figure 4.
Table 1 shows an investor s average required
return per economic indicator. These results pro-
vide more than mathematical curiosities. Shrewd
investors can take positions on the f uture direction
of each driver and contemplate the direction of
f uture discount rate moves. Key questions to ask
when considering which way the discount rate
might move include:

Where is the yield on the 10- year Treasury
heading?
Will credit spreads tighten?
Will volatility remain subdued or increase?
Will investor taxes increase?
Will markets experience hyperinf lation, def la-
tion or moderate inf lation?
Worl dwi de market -i mpl i ed di scount rat es
What about today' s real discount rate f or other
markets? Are they expensive or cheap? How do
they compare to their respective histories? We
have plotted the results f or the G20 (plus Switzer-
land) in a box- and- whisker chart in Figure 5. The
chart shows today' s discount rate f or each country
along with its minimum, median and maximum
values over the past decade, and the 25th and
75th percentile values.
The chart goes from countries with low market-
implied returns at the left to countries with high
returns at the right, i.e., greatest to the least risk
appetite. It is clear that developing and resource-
rich markets dominate the left- hand side of the
chart. Clearly, investors have pushed the valuations
of these markets into dear territory. Behavioral
studies routinely show that human beings tend to
overestimate growth and are overly optimistic.
These hallmarks appear to be embedded in market
expectations for developing markets, so caution is
warranted. At the other end of the spectrum, we
can see that markets are not particularly sanguine
about Europe and Japan. The notion of risk ap-
pears to have been flipped on its head and mirrors
investor enthusiasm for emerging markets in 2010.
Investors need to ask if they are being properly
compensated f or the risk they are taking in devel-
oping markets. Bullish investors are encouraged to
compare their forecasts to the mean reverting
assumptions employed in the HOLT estimates.
Fi gure 4
Cont ribut ion of various discount rat e drivers
Source: Credit Suisse HOLT 17 January 2011
HOLT Risk Attribution Model
-1
0
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m
1
Inflation
IP volatility
Marginal tax rates
Over corporates
Over risk-free
LT real yield 1.5%
Discount rate
HOLT Risk Attribution Model
-1
0
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m
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m
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m
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m
1
Inflation
IP volatility
Marginal tax rates
Over corporates
Over risk-free
LT real yield 1.5%
Discount rate
Table 1
Component ri sk cont ri but i on
Source: Credit Suisse HOLT
Expl anat ory f act or Average Mi n. Dat e Max. Dat e
Inflation 1.87 0.95 2009m7 6.69 1980m3
Industrial production volatility 1.72 1.09 1989m1 2.68 1976m2
US Treasury yield (real rate) 1.20 1.52 1980m6 3.53 1983m8
Corporate bond yield 0.73 0.31 1978m12 2.04 2008m12
Marginal tax rates 0.49 0.37 1981m1 1.00 1988m1
Average real discount rate 6.00

When using this chart, it is recommended that
you consider the absolute yield relative to the
long- term discount rate thermometer, and then
each country relative to itself . Bearing the f irst
condition in mind, all countries below 5% should
beg the question, Is the valuation f or this market
rich? The degree of alarm can be gauged f rom
the country' s behavior relative to itself over the
past decade, which is the second test in the event
of idiosyncratic issues. Argentina, Mexico and
Brazil lie below 5% and are trading at decade low
yields. They appear to be overbought unless in-
vestors believe our mean reverting f orecasts f or
them are too pessimistic. Russia and Korea trade
at high yields due to idiosyncratic risks but are
presently trading at low yields relative to their
respective histories. In the case of Russia, inves-
tors are particularly concerned about corporate
governance and we believe this concern is re-
f lected in the discount rate. Investors who believe
these f ears are overblown should view Russia as
attractive value.
We estimate the ERP f or key regions in Figure
6, and see that the ERP f or developed markets is
f ar more attractive than the ERP f or developing
markets. This prompts the question of whether
equity investors will be compensated f or the extra
risk they are taking in developing markets. Con-
trarians might counter that developed markets are
riskier but would benef it f rom ref lecting on the
wide gap in the ERP estimates.
Gaugi ng market at t ract i veness
We have shown how the HOLT discount rate can be
used to quantify risk appetite and indicate stock
market attractiveness. Results for the USA over the
past 60 years give a long-term sense for risk appe-
tite regimes and were used to estimate a market-
implied ERP time series. Suffice to say, risk appetite
can vary significantly! Today' s US discount rate
indicates an expensive market, while today' s ERP for
the USA indicates that it is attractive.
We investigated and quantif ied drivers of the
discount rate. We translated those drivers into
questions investors should consider when trying to
understand the f uture trajectory of the discount
rate. We concluded the paper by commenting on
today' s discount rates f or the G20 (plus Switzer-
land). Today' s yields indicate that developing and
resource- rich markets are trading at relatively
expensive prices. One could conclude that f uture
growth and optimism are already embedded in
their market expectations. Mature, developed
markets look attractive in comparison.
Fi gure 6
Market -implied ERP est imat es f or various regions
Source: Credit Suisse HOLT 17 January 2011
2.3
3.5
1.1 1.1
2.3 2.1
2.6
2.7
5. 1
6.1
6.1
6.8
0
2
4
6
8
10
Japan Europe UK USA Emerging APxJ
C
o
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t

o
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%
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Equity risk premium Risk free rate BBB 710 year yield
2.3
3.5
1.1 1.1
2.3 2.1
2.6
2.7
5. 1
6.1
6.1
6.8
0
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10
Japan Europe UK USA Emerging APxJ
C
o
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o
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Equity risk premium Risk free rate BBB 710 year yield

Fi gure 5
Ent erprise value-weight ed market -derived discount rat es by count ry
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CREDIT SUISSE GL OBAL INVESTMENT RETURNS YEARBOOK 2 0 1 1 Count r y pr of i l es_31

Gui de t o t he count ry prof i l es
Individual
markets
El r oy Di mson, Paul Mar sh and Mi ke St aunt on
London Business School
The Credit Suisse Global Invest ment Ret urns Yearbook
covers 22 count ries and regions, all wit h index series
t hat st art in 1900. Figure 1 shows t he relat ive sizes of
world equit y market s at our base dat e of end- 1899.
Figure 2 shows how t hey had changed by end- 2010.
Market s t hat are not included in t he Yearbook dat aset
are colored in black. As t hese pie chart s show, t he
Yearbook covered 89% of t he world equit y market in
1900 and 83% by end- 2010.
In t he count ry pages t hat f ollow, t here are t hree chart s
f or each count ry or region. The upper chart report s, f or
t he last 111 years, t he real value of an init ial invest ment
in equit ies, long- t erm government bonds, and Treasury
bills, all wit h income reinvest ed. The middle chart
report s t he annualized premium achieved by equit ies
relat ive t o bonds and t o bills, measured over t he last
decade, quart er- cent ury, half - cent ury, and f ull 111
years. The bot t om chart compares t he 111- year
annualized real ret urns, nominal ret urns, and st andard
deviat ion of real ret urns f or equit ies, bonds, and bills.
The count ry pages provide dat a f or 19 count ries, list ed
alphabet ically st art ing on t he next page, and f ollowed by
t hree broad regional groupings. The lat t er are a 19-
count ry world equit y index denominat ed in USD, an
analogous 18- count ry world ex- US equit y index, and an
analogous 13- count ry European equit y index. All equit y
indexes are weight ed by market capit alizat ion (or, in
years bef ore capit alizat ions were available, by GDP). We
also comput e bond indexes f or t he world, world ex- US
and Europe, wit h count ries weight ed by GDP.
Ext ensive addit ional inf ormat ion is available in t he Credit
Suisse Global Invest ment Ret urns Sourcebook 2011.
This 200- page ref erence book, which is available
t hrough London Business School, cont ains bibliographic
inf ormat ion on t he dat a sources f or each count ry. The
underlying dat a are available t hrough Morningst ar Inc.

The Year book s gl obal coverage
The Yearbook cont ains annual ret urns on st ocks, bonds, bills, inf lat ion,
and currencies f or 19 count ries f rom 1900 t o 2010. The count ries
comprise t wo Nort h American nat i ons (Canada and t he USA), eight
euro- currency area st at es (Belgium, Finland, France, Germany, Ireland,
It aly, t he Net herlands, and Spain), f ive European market s t hat are
out side t he euro area (Denmark, Norway, Sweden, Swit zerland, and t he
UK), t hree Asia- Pacif ic count ries (Aust ralia, Japan, and New Zealand),
and one Af rican market (Sout h Af rica). These count ries covered 89 % of
t he global st ock market in 1 900, and 83% of it s market capit alizat ion
by t he st art of 20 11.

Fi gur e 1
Rel at i ve si zes of worl d st ock market s, end-1899

UK 30.5%
USA 19.3%
France 14.3%
Netherlands 1.6%
Germany 6.9%
Japan 4.0%
Russia 3.9%
Austria- Hungary 3.5%
Belgium 3.8%
Canada 1.8%
Italy 1.6%
Other Yearbook 5.1%
Other 3.6%
UK 30.5%
USA 19.3%
France 14.3%
Netherlands 1.6%
Germany 6.9%
Japan 4.0%
Russia 3.9%
Austria- Hungary 3.5%
Belgium 3.8%
Canada 1.8%
Italy 1.6%
Other Yearbook 5.1%
Other 3.6%
Fi gur e 2
Rel at i ve si zes of worl d st ock market s, end-2010

Japan 8.2%
Other 16.9%
UK 8.1%
Sweden 1.3%
Canada 4.1%
France 3.9%
Australia 3.4%
Switzerland 3.0%
Germany 3.2%
Spain 1.4%
Other Yearbook 5.2%
USA 41.4%
Japan 8.2%
Other 16.9%
UK 8.1%
Sweden 1.3%
Canada 4.1%
France 3.9%
Australia 3.4%
Switzerland 3.0%
Germany 3.2%
Spain 1.4%
Other Yearbook 5.2%
USA 41.4%

Source: Elroy Dimson, Paul Marsh and Mi ke St aunt on, Credit Suisse Global Invest ment
Ret urns Sourcebook 2 0 1 1 .

Bi bl i ography and dat a sources
1. Dimson, E., P. R. Marsh and M. Staunton, 2002, Triumph of t he
Opt imist s, 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 t he Equit y
Risk Premium, Amsterdam: Elsevier
3. Dimson, E., P. R. Marsh and M. Staunton, 2011, Credit Suisse Global
Invest ment Ret urns Sourcebook 2 011, Zurich: Credit Suisse Research
Institute
4. Dimson, E., P. R. Marsh and M. Staunton, 2011, The Dimson- Marsh-
St aunt on Global Invest ment Ret urns Dat abase, Morningstar Inc. (t he
DMS dat a module)


Aust ral i a
The lucky
country
Aust ralia is of t en described as t he Lucky Count ry wit h
ref erence t o it s nat ural resources, prosperit y, weat her,
and dist ance f rom problems elsewhere in t he world. But
maybe Aust ralians make t heir own luck: in 2011 t he
Herit age Foundat ion ranked Aust ralia as t he count ry
wit h t he highest economic f reedom in t he world, beat en
only by a couple of cit y- st at es t hat also score highly.
Whet her it is down t o luck or good economic
management , Aust ralia has been t he best - perf orming
equit y market over t he 111 years since 1900, wit h a
real ret urn of 7. 4% per year.
The Aust ralian Securit ies Exchange (ASX) has it s origins
in six separat e exchanges, est ablished as early as 1861
in Melbourne and 1871 in Sydney, well bef ore t he
f ederat ion of t he Aust ralian colonies t o f orm t he
Commonwealt h of Aust ralia in 1901. The ASX is now
t he world s sixt h- largest st ock exchange. More t han half
t he index is represent ed by banks (28%) and mining
(23%), while t he largest st ocks at t he st art of 2011 are
BHP Billit on, Commonwealt h Bank of Aust ralia, and
West pac.
Aust ralia also has a signif icant government and
corporat e bond market , and is home t o t he largest
f inancial f ut ures and opt ions exchange in t he Asia-
Pacif ic region. Sydney is a major global f inancial cent er.

Capi t al market ret urns f or Aust ral i a
Figure 1 shows t hat , over t he last 111 years, t he real value of equit ies,
wit h income reinvest ed, grew by a f act or of 2862. 1 as compared t o 4. 9
f or bonds and 2. 1 f or bills. Figure 2 shows t hat , since 19 00, equit ies
beat bonds by 5. 9% and bills by 6 . 7% per year. Figure 3 shows t hat
t he long- t erm real ret urn on Aust ralian equit ies was an annualized 7. 4%
as compared t o bonds and bills, which gave a real ret urn of 1. 4 % and
0. 7% respect ively. For addit ional explanat ions of t hese f igures, see
page 31.
Fi gur e 1
Annual i zed perf ormance f rom 1900 t o 2010
2,862
4.9
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
Fi gur e 2
Equi t y ri sk premi um over 10 t o 111 years
2.7
3.5
6.7
0.5
3.5
5.9
3.1
3.2
- 10
- 5
0
5
10
20012010 19862010 19612010 19002010
Premium vs Bonds (% p.a.) Premium vs Bills (% p.a.)
Fi gur e 3
Ret urns and ri sk of maj or asset cl asses si nce 1900
7.4
11.6
18.2
1.4 5.4
13.2
0.7 4.6
5.4
- 5
0
5
10
15
20
25
Real return (%) Nominal return (%) Standard deviation



Bel gi um
At the heart
of Europe
Lit huania claims t o lie at t he geographical heart of
Europe, but Belgium can also assert cent ralit y. It lies at
t he crossroads of Europe s economic backbone and it s
key t ransport and t rade corridors, and is t he
headquart ers of t he European Union. In 2010, Belgium
was ranked t he most globalized of t he 181 count ries
t hat are evaluat ed by t he KOF Index of Globalizat ion.
Belgium s st rat egic locat ion has been a mixed
blessing, making it a major bat t leground in t wo world
wars. The ravages of war and at t endant high inf lat ion
rat es are an import ant cont ribut ory f act or t o it s poor
long- run invest ment ret urns Belgium has been one of
t he t wo worst - perf orming equit y market s and t he sixt h
worst perf orming bond market .
The Brussels st ock exchange was est ablished in 1801
under French Napoleonic rule. Brussels rapidly grew
int o a major f inancial cent er, specializing during t he
early 20t h cent ury in t ramways and urban t ransport .
It s import ance has gradually declined, and Euronext
Brussels suf f ered badly during t he recent banking
crisis. Three large banks made up a majorit y of it s
market capit alizat ion at st art - 2008, but t he banking
sect or now represent s only 6% of t he index. At t he
st art of 2011, more t han half of t he index was invest ed
in just t wo companies: Anheuser- Busch (45%) and
Delhaize (7%).

Capi t al market ret urns f or Bel gi um
t he long- t erm real ret urn on Belgium equit ies was an annualized 2. 5 %
as compared t o bonds and bills, which gave a real ret urn of 0. 1%
and 0. 3% respect ively. For addit ional explanat ions of t hese f igures,
see page 3 1.
Fi gur e 1
16
0.9
0.7
0
1
10
100
1900 10 20 30 40 50 60 70 80 90 2000 10
Fi gur e 2
2.1
2.9
-4.7
0.2
1.0 2.6
3.1
-2.1
-10
-5
0
5
10
20012010 19862010 19612010 19002010
Fi gur e 3
2.5
8.0
23.6
- 0.1
5.2
12.0
- 0.3
5.0
8.0
- 5
0
5
10
15
20
25



Canada
Resourceful
country
Canada is t he world s second- largest count ry by land
mass (af t er Russia), and it s economy is t he t ent h- largest .
As a brand, it is rat ed number one out of 110 count ries
monit ored in t he lat est Count ry Brand Index. It is blessed
wit h nat ural resources, having t he world s second- largest
oil reserves, while it s mines are leading producers of
nickel, gold, diamonds, uranium and lead. It is also a
major export er of sof t commodit ies, especially grains and
wheat , as well as lumber, pulp and paper.
The Canadian equit y market dat es back t o t he opening of
t he Toront o St ock Exchange in 1861 and is t he world s
f ourt h- largest , account ing f or 4. 1% of world capit alizat ion.
Canada also has t he world s nint h- largest bond market .
Given Canada s nat ural endowment , it is no surprise t hat
oil and gas and mining st ocks have a 38% weight ing in it s
equit y market , while a f urt her 33% is account ed f or by
f inancials. The largest st ocks are current ly Royal Bank of
Canada, Toront o- Dominion Bank and Suncor Energy.
Canadian equit ies have perf ormed well over t he long run,
wit h a real ret urn of 5. 9% per year. The real ret urn on
bonds has been 2. 1% per year. These f igures are close t o
t hose f or t he Unit ed St at es.

Capi t al market ret urns f or Canada
wit h income reinvest ed, grew by a f act or of 550. 9 as compared t o 1 0. 0
t he long- t erm real ret urn on Canadian equit ies was an annualized 5. 9%
page 31.
Fi gur e 1
551
10.0
5.7
0
1
10
100
1,000
1900 10 20 30 40 50 60 70 80 90 2000 10
Fi gur e 2
3.1
4.2
- 0.9
- 0.7
1.7
3.7
3.4
3.8
- 10
- 5
0
5
10
20012010 19862010 19612010 19002010
Fi gur e 3
5.9
9.1
17.2
2.1
5.2
10.4
1.6
4.7 4.9
- 5
0
5
10
15
20
25



Denmark
Happiest
nation
In a 2011 met a- survey published by t he Nat ional Bureau
of Economic Research, Denmark was ranked t he
happiest nat ion on eart h, closely f ollowed by Sweden,
Swit zerland, and Norway.
What ever t he source of Danish happiness, it does not
appear t o spring f rom out st anding equit y ret urns. Since
1900, Danish equit ies have given an annualized real
ret urn of 5. 1%, which, while respect able, is below t he
world ret urn of 5. 5%.
In cont rast , Danish bonds gave an annualized real ret urn
of 3. 0%, t he highest among t he Yearbook count ries.
This is because our Danish bond ret urns, unlike t hose
f or t he ot her 18 count ries, include an element of credit
risk. The ret urns are t aken f rom a st udy by Claus
Parum, who f elt it was more appropriat e t o use
mort gage bonds, rat her t han more t hinly t raded
government bonds.
The Copenhagen St ock Exchange was f ormally
est ablished in 1808, but can t race it s root s back t o t he
lat e 17t h cent ury. The Danish equit y market is relat ively
small. It has a high weight ing in healt hcare (51%) and
indust rials (19%), and t he largest st ocks list ed in
Copenhagen are Novo- Nordisk, Danske Banking, and
AP MollerMaersk.

Capi t al market ret urns f or Denmark
f or bonds and 11 . 9 f or bills. Figure 2 shows t hat , since 1900 , equit ies
t he long- t erm real ret urn on Danish equit ies was an annualized 5. 1% as
compared t o bonds and bills, which gave a real ret urn of 3. 0 % and
page 31.
Fi gur e 1
248
27.9
11.9
0
1
10
100
1,000
1900 10 20 30 40 50 60 70 80 90 2000 10
Fi gur e 2
3.3
2.8
0.9
0.7
1.2
2.0
3.3
3.9
- 10
- 5
0
5
10
20012010 19862010 19612010 19002010
Fi gur e 3
5.1
9.2
20.9
3.0
7.1
11.7
2.3
6.2 6.0
- 5
0
5
10
15
20
25



Fi nl and
East meets
West
Wit h it s proximit y t o t he Balt ic and Russia, Finland is a
meet ing place f or East ern and West ern European
cult ures. This count ry of snow, swamps and f orest s
one of Europe s most sparsely populat ed nat ions was
part of t he Kingdom of Sweden unt il sovereignt y
t ransf erred in 1809 t o t he Russian Empire. In 1917,
Finland became an independent count ry.
Newsweek magazine ranks Finland as t he best count ry
t o live in t he whole world in it s August 2010 survey of
educat ion, healt h, qualit y of lif e, economic
compet it iveness, and polit ical environment of 100
count ries. A member of t he European Union since
1995, Finland is t he only Nordic st at e in t he euro
currency area.
The Finns have t ransf ormed t heir count ry f rom a f arm
and f orest - based communit y t o a diversif ied indust rial
economy operat ing on f ree- market principles. The
OECD ranks Finnish schooling as t he best in t he world.
Per capit a income is among t he highest in West ern
Europe.
Finland excels in high- t ech export s. It is home t o Nokia,
t he world s largest manuf act urer of mobile t elephones,
which has been rat ed t he most valuable global brand
out side t he USA. Forest ry, an import ant export earner,
provides a secondary occupat ion f or t he rural populat ion.
Finnish securit ies were init ially t raded over- t he- count er
or overseas, and t rading began at t he Helsinki St ock
Exchange in 1912. Since 2003, t he Helsinki exchange
has been part of t he OMX f amily of Nordic market s. At
it s peak, Nokia represent ed 72% of t he value- weight ed
HEX All Shares Index, and Finland is a highly
concent rat ed st ock market . The largest Finnish
companies are current ly Nokia (31% of t he market ),
Sampo, and Fort um.

Capi t al market ret urns f or Fi nl and
t he long- t erm real ret urn on Finnish equit ies was an annualized 5. 4%,
see page 3 1.
Fi gur e 1
334
0.8
0.6
0
1
10
100
1,000
1900 10 20 30 40 50 60 70 80 90 2000 10
Fi gur e 2
- 7.3
5.1
5.9
4.6 4.6
5.6
6.8
- 4.4
- 10
- 5
0
5
10
20012010 19862010 19612010 19002010
Fi gur e 3
5.4
13.1
- 0.2
7.1
13.7
- 0.5
6.8
11.9
- 5
0
5
10
15
20
25
30.3



France
European
center
Paris and London compet ed vigorously as f inancial
cent ers in t he 19t h cent ury. Af t er t he Franco- Prussian
War in 1870, London achieved dominat ion. But Paris
remained import ant , especially, t o it s lat er disadvant age,
in loans t o Russia and t he Medit erranean region,
including t he Ot t oman Empire. As Kindelberger, t he
economic hist orian put it , London was a world f inancial
cent er; Paris was a European f inancial cent er.
Paris has cont inued t o be an import ant f inancial cent er
while France has remained at t he cent er of Europe,
being a f ounder member of t he European Union and t he
euro. France is Europe s second- largest economy. It has
t he largest equit y market in Cont inent al Europe, ranked
f if t h in t he world, and t he f ourt h- largest bond market in
t he world. At t he st art of 2011, France s largest list ed
companies were Tot al, Sanof iAvent is, and BNP
Paribas.
Long- run French asset ret urns have been disappoint ing.
France ranks 16t h out of t he 19 Yearbook count ries f or
equit y perf ormance, 15t h f or bonds and 18t h f or bills. It
has had t he t hird- highest inf lat ion, hence t he poor f ixed
income ret urns. However, t he inf lat ionary episodes and
poor perf ormance dat e back t o t he f irst half of t he 20t h
cent ury and are linked t o t he world wars. Since 1950,
French equit ies have achieved mid- ranking ret urns.

Capi t al market ret urns f or France
f or bonds and 0. 04 f or bills. Figure 2 shows t hat , since 1900 , equit ies
t he long- t erm real ret urn on French equit ies was an annualized 3. 1%,
see page 3 1.
Fi gur e 1
28
0.8
0.04
0
0
1
10
100
1900 10 20 30 40 50 60 70 80 90 2000 10
0.1
Fi gur e 2
- 6.0
3.6
6.0
0.0
- 0.9
3.2
3.8
- 2.6
- 10
- 5
0
5
10
20012010 19862010 19612010 19002010
Fi gur e 3
3.1
10.5
23.5
- 0.1
7.1
13.0
- 2.8
4.2
9.6
- 5
0
5
10
15
20
25



Germany
Locomotive
of Europe
German capit al market hist ory changed radically af t er
World War II. In t he f irst half of t he 20t h cent ury,
German equit ies lost t wo- t hirds of t heir value in World
War I. In t he hyperinf lat ion of 192223, inf lat ion hit 209
billion percent , and holders of f ixed income securit ies
were wiped out . In World War II and it s immediat e
af t ermat h, equit ies f ell by 88% in real t erms, while
bonds f ell by 91%.
There was t hen a remarkable t ransf ormat ion. In t he early
st ages of it s economic miracle, German equit ies rose
by 4, 094% in real t erms f rom 1949 t o 1959. Germany
rapidly became known as t he locomot ive of Europe.
Meanwhile, it built a reput at ion f or f iscal and monet ary
prudence. From 1949 t o dat e, it has enjoyed t he world s
lowest inf lat ion rat e, it s st rongest currency (now t he
euro), and t he second best - perf orming bond market .
Today, Germany is Europe s largest economy. Formerly
t he world s t op export er, it has now been overt aken by
China. It s st ock market , which dat es back t o 1685,
ranks sevent h in t he world by size, while it s bond market
is t he world s sixt h- largest .
The German st ock market ret ains it s bias t owards
manuf act uring, wit h weight ings of 20% in indust rials,
19% in consumer goods, and 19% in basic mat erials.
The largest st ocks are Siemens, BASF, Daimler, and
E. ON.

Capi t al market ret urns f or Germany
wit h income reinvest ed, grew by a f act or of 28. 3 as compared t o 0. 1 2
t he long- t erm real ret urn on German equit ies was an annualized 3. 1 %
and 2. 4% respect ively. We exclude 1922 23 f or all series except real
equit y ret urns. For f urt her explanat ions of t hese f igures, see page 31.
Fi gur e 1
28
0.12
0.07
0
0
1
10
100
1900 10 20 30 40 50 60 70 80 90 2000 10
0.1
Fi gur e 2
- 4.3
2.1
5.9
- 0.8
- 0.1
5.4
1.6
- 1.0
- 10
- 5
0
5
10
20012010 19862010 19612010 19002010
Fi gur e 3
3.1
8.3
- 1.9
2.8
15.5
- 2.4
2.3
13.2
- 5
0
5
10
15
20
25
32.2



Irel and
Born free
Ireland was born as an independent count ry in 1922 as
t he Irish Free St at e, f ree at last af t er 700 years of
Norman and lat er Brit ish involvement and cont rol. By t he
1990s and early 2000s, Ireland experienced great
economic success and became known as t he Celt ic
Tiger. The f inancial crisis changed t hat , and t he count ry
is now f acing hardship. Just as t he Born Free
Foundat ion aims t o f ree t igers f rom being held capt ive in
zoos, Ireland now needs t o be saved f rom being a
capt ive of t he economic syst em.
By 2007, Ireland had become t he world s f if t h- richest
count ry in t erms of GDP per capit a, t he second- richest
in t he EU, and was experiencing net immigrat ion. Over
t he period 19872006, Ireland had t he second- highest
real equit y ret urn of any Yearbook count ry. The count ry
is one of t he smallest Yearbook market s, and sadly, it
has shrunk since 2006. Too much of t he market boom
was based on real est at e, f inancials and leverage, and
Irish st ocks are now wort h only one- t hird of t heir value
at t he end of 2006. At t hat dat e, t he Irish market had a
57% weight ing in f inancials, but by t he beginning of
2011 t hey represent ed only 6% of t he index. The
capt ive t iger now has a smaller bit e.
Though Ireland gained it s independence in 1922, st ock
exchanges had exist ed f rom 1793 in Dublin and Cork. In
order t o monit or Irish st ocks f rom 1900, we const ruct ed
an index f or Ireland based on st ocks t raded on t hese
t wo exchanges. In t he period f ollowing independence,
economic growt h and st ock market perf ormance were
weak, and during t he 1950s t he count ry experienced
large- scale emigrat ion. Ireland joined t he European
Union in 1973, and f rom 1987 t he economy improved. It
swit ched it s currency f rom t he punt t o t he euro in
January 2002, and all invest ment ret urns ref lect t he
st art - 2002 currency conversion f act or.

Capi t al market ret urns f or Irel and
t he long- t erm real ret urn on Irish equit ies was an annualized 3. 8 % as
page 31.
Fi gur e 1
60
2.6
2.2
0
1
10
100
1,000
1900 10 20 30 40 50 60 70 80 90 2000 10
Fi gur e 2
- 6.2
4.1
3.0
0.5
3.5
2.9
2.4
- 6.9
- 10
- 5
0
5
10
20012010 19862010 19612010 19002010
Fi gur e 3
3.8
8.2
23.2
0.9
5.2
14.9
0.7
5.0
6.7
- 5
0
5
10
15
20
25



It al y
Banking
innovators
While banking can t race it s root s back t o Biblical t imes,
It aly can claim a key role in t he early development of
modern banking. Nort h It alian bankers, including t he
Medici, dominat ed lending and t rade f inancing
t hroughout Europe in t he Middle Ages. These bankers
were known as Lombards, a name t hat was t hen
synonymous wit h It alians. Indeed, banking t akes it s
name f rom t he It alian word banca, " t he bench on which
t he Lombards used t o sit t o t ransact t heir business.
It aly ret ains a large banking sect or t o t his day, wit h
f inancials st ill account ing f or 36% of t he It alian equit y
market . Oil and gas account s f or a f urt her 23%, and t he
largest st ocks t raded on t he Milan St ock Exchange are
Eni, Unicredit o, and Enel.
Sadly, It aly has experienced some of t he poorest asset
ret urns of any Yearbook count ry. Since 1900, t he
annualized real ret urn f rom equit ies has been 2. 0%, t he
lowest ret urn out of 19 count ries. Apart f rom Germany,
wit h it s post - World War I and post - World War II
hyperinf lat ions, It aly has experienced t he second- worst
real bond and worst bill ret urns of any Yearbook count ry,
and t he highest inf lat ion rat e and weakest currency.
Today, It aly s st ock market is t he world s 17t h largest ,
but it s highly developed bond market is t he world s
t hird- largest .

Capi t al market ret urns f or It al y
wit h income reinvest ed, grew by a f act or of 9. 1 as compared t o 0. 2 f or
bonds and 0. 02 f or bills. Figure 2 shows t hat , since 1900, equit ies beat
bonds by 3. 7% and bills by 5. 8% per year. Figure 3 shows t hat t he
long- t erm real ret urn on It alian equit ies was an annualized 2. 0 % as
compared t o bonds and bills, which generat ed annualized real ret urns
of 1. 7 % and 3 . 6% respect ively. For addit ional explanat ions of t hese
f igures, see page 31.
Fi gur e 1
9
0.2
0.02
0
0
1
10
100
1900 10 20 30 40 50 60 70 80 90 2000 10
0.1
Fi gur e 2
- 7.3
5.8
- 3.7
- 1.9
3.7
0.4
0.8
- 5.2
- 10
- 5
0
5
10
20012010 19862010 19612010 19002010
Fi gur e 3
2.0
10.6
29.0
- 1.7
6.7
14.1
- 3.6
4.5
11.5
- 5
0
5
10
15
20
25



Japan
Birthplace
of futures
Japan has a long herit age in f inancial market s. Trading
in rice f ut ures had been init iat ed around 1730 in Osaka,
which creat ed it s st ock exchange in 1878. Osaka was t o
become t he leading derivat ives exchange in Japan (and
t he world s largest f ut ures market in 1990 and 1991)
while t he Tokyo st ock exchange, also f ounded in 1878,
was t o become t he leading market f or spot t rading.
From 1900 t o 1939, Japan was t he world s second-
best equit y perf ormer. But World War II was disast rous
and Japanese st ocks lost 96% of t heir real value. From
1949 t o 1959, Japan s economic miracle began and
equit ies gave a real ret urn of 1, 565%. Wit h one or t wo
set backs, equit ies kept rising f or anot her 30 years.
By t he st art of t he 1990s, t he Japanese equit y market
was t he largest in t he world, wit h a 40% weight ing in
t he world index versus 32% f or t he USA. Real est at e
values were also riding high and it was alleged t hat t he
grounds of t he Imperial palace in Tokyo were wort h
more t han t he ent ire St at e of Calif ornia.
Then t he bubble burst . From 1990 t o t he st art of 2009,
Japan was t he worst - perf orming st ock market . At t he
st art of 2011 it s capit al value is st ill only one- t hird of it s
value at t he beginning of t he 1990s. It s weight ing in t he
world index f ell f rom 40% t o 8%. Meanwhile, Japan
suf f ered a prolonged period of st agnat ion, banking
crises and def lat ion. Hopef ully, t his will not f orm t he
blueprint f or ot her count ries t hat are hoping t o emerge
f rom t heir own f inancial crises.
Despit e t he f allout f rom t he burst ing of t he asset
bubble, Japan remains a major economic power, wit h
t he world s second- largest GDP. It has t he world s
second- largest equit y market as well as it s second-
biggest bond market . It is a world leader in t echnology,
aut omobiles, elect ronics, machinery and robot ics, and
t his is ref lect ed in t he composit ion of it s equit y market .

Capi t al market ret urns f or Japan
t he long- t erm real ret urn on Japanese equit ies was an annualized 3. 8%
see page 3 1.
Fi gur e 1
64
0.3
0.12
0
0
1
10
100
1,000
1900 10 20 30 40 50 60 70 80 90 2000 10
0.1
0.01
Fi gur e 2
- 5.2
2.6
5.9
- 5.3
- 1.4
5.0
- 1.7
- 2.4
- 10
- 5
0
5
10
20012010 19862010 19612010 19002010
Fi gur e 3
3.8
11.1
29.8
- 1.1
5.8
20.1
- 1.9
5.0
13.9
- 5
0
5
10
15
20
25



Net herl ands
Exchange
pioneer
Alt hough some f orms of st ock t rading occurred in
Roman t imes, organized t rading did not t ake place unt il
t ransf erable securit ies appeared in t he 17t h cent ury.
The Amst erdam market , which st art ed in 1611, was t he
world s main cent er of st ock t rading in t he 17t h and
18t h cent uries. A book writ t en in 1688 by a Spaniard
living in Amst erdam (appropriat ely ent it led Conf usion de
Conf usiones) describes t he amazingly diverse t act ics
used by invest ors. Even t hough only one st ock was
t raded t he Dut ch East India Company t hey had
bulls, bears, panics, bubbles and ot her f eat ures of
modern exchanges.
The Amst erdam Exchange cont inues t o prosper t oday as
part of Euronext . Over t he years, Dut ch equit ies have
generat ed a mid- ranking real ret urn of 5. 0% per year.
The Net herlands also has a signif icant bond market ,
which is t he world s 12t h- largest . The Net herlands has
t radit ionally been a low inf lat ion count ry and, since
1900, has enjoyed t he second- lowest inf lat ion rat e
among t he Yearbook count ries (af t er Swit zerland).
The Net herlands has a prosperous open economy. The
largest energy company in t he world, Royal Dut ch Shell,
now has it s primary list ing in London and a secondary
list ing in Amst erdam. But t he Amst erdam Exchange st ill
host s more t han it s share of major mult inat ionals,
including Unilever, ArcelorMit t al, ING Group, and
Philips.

Capi t al market ret urns f or t he Net herl ands
t he long- t erm real ret urn on Dut ch equit ies was an annualized 5. 0% as
page 31.
Fi gur e 1
218
4.8
2.2
0
1
10
100
1,000
1900 10 20 30 40 50 60 70 80 90 2000 10
Fi gur e 2
- 7.1
4.5
4.2
1.7
3.3
3.5
4.2
- 4.0
- 10
- 5
0
5
10
20012010 19862010 19612010 19002010
Fi gur e 3
5.0
8.0
21.8
1.4
4.4
9.4
0.7 3.6
5.0
- 5
0
5
10
15
20
25



New Zeal and
Purity and
integrity
For a decade, New Zealand has been promot ing it self
t o t he world as 100% pure and Forbes calls t his
market ing drive one of t he world' s t op t en t ravel
campaigns. But t he count ry also prides it self on
honest y, openness, good governance, and f reedom t o
run businesses. According t o Transparency
Int ernat ional, in 2010 New Zealand was perceived as
t he least corrupt count ry in t he world. The Wall St reet
Journal ranks New Zealand as t he best in t he world f or
business f reedom. The Global Peace Index f or 2011
rat es t he count ry as t he most peacef ul in t he world.
The Brit ish colony of New Zealand became an
independent dominion in 1907. Tradit ionally, New
Zealand' s economy was built upon on a f ew primary
product s, not ably wool, meat , and dairy product s. It
was dependent on concessionary access t o Brit ish
market s unt il UK accession t o t he European Union.
Over t he last t wo decades, New Zealand has evolved
int o a more indust rialized, f ree market economy. It
compet es globally as an export - led nat ion t hrough
ef f icient port s, airline services, and submarine f iber-
opt ic communicat ions.
The New Zealand Exchange t races it s root s t o t he
Gold Rush of t he 1870s. In 1974, t he regional st ock
market s merged t o f orm t he New Zealand St ock
Exchange. In 2003, t he Exchange demut ualized, and
of f icially became t he New Zealand Exchange Limit ed.
The largest f irms t raded on t he exchange are Flet cher
Building and Telecom Corporat ion of New Zealand.

Capi t al market ret urns f or New Zeal and
t he long- t erm real ret urn on New Zealand equit ies was an annualized
5. 8% as compared t o bonds and bills, which gave a real ret urn of 2 . 0%
and 1. 7% respect ively. For addit ional explanat ions of t hese f igures, see
page 31.
Fi gur e 1
533
8.8
6.3
0
1
10
100
1,000
1900 10 20 30 40 50 60 70 80 90 2000 10
Fi gur e 2
2.3
4.1
1.1
- 4.5
2.2
3.8
- 2.2
1.7
- 10
- 5
0
5
10
20012010 19862010 19612010 19002010
Fi gur e 3
5.8
9.8
19.7
2.0
5.8
9.0
1.7
5.5
4.7
- 5
0
5
10
15
20
25



Norway
Nordic oil
kingdom
Norway is a very small count ry (ranked 115t h by
populat ion and 61st by land area) surrounded by large
nat ural resources t hat make it t he world s f ourt h- largest
oil export er and t he second- largest export er of f ish.
The populat ion of 4. 8 million enjoys t he second- largest
GDP per capit a in t he world and lives under a
const it ut ional monarchy out side t he Eurozone (a
dist inct ion shared wit h t he UK). The Unit ed Nat ions,
t hrough it s Human Development Index, ranks Norway
t he best count ry in t he world f or lif e expect ancy,
educat ion and st andard of living.
The Oslo st ock exchange (OSE) was f ounded as
Christ iania Bors in 1819 f or auct ioning ships,
commodit ies and currencies. Lat er, t his ext ended t o
t rading in st ocks and shares. The exchange now f orms
part of t he OMX grouping of Scandinavian exchanges.
In t he 1990s, t he Government est ablished it s pet roleum
f und t o invest t he surplus wealt h f rom oil revenues. This
has grown t o become t he largest f und in Europe and t he
second- largest in t he world, wit h a market value above
USD 0. 5 t rillion. The f und invest s predominant ly in
equit ies and, on average, it owns more t han one percent
of every list ed company in t he world.
The largest OSE st ocks are St at oil, DnB NOR, and
Telenor.

Capi t al market ret urns f or Norway
t he long- t erm real ret urn on Norwegian equit ies was an annualized
page 31.
Fi gur e 1
97
6.6
3.6
0
1
10
100
1,000
1900 10 20 30 40 50 60 70 80 90 2000 10
Fi gur e 2
3.1
3.5
3.0 1.0
2.8
2.5
3.9
5.9
- 10
- 5
0
5
10
20012010 19862010 19612010 19002010
Fi gur e 3
4.2
8.1
27.4
1.7
5.5
12.2
1.2
4.9
7.2
- 5
0
5
10
15
20
25



Sout h Af ri ca
Golden
opportunity
The discovery of diamonds at Kimberley in 1870 and t he
Wit wat ersrand gold rush of 1886 had a prof ound impact
on Sout h Af rica s subsequent hist ory. Today, Sout h
Af rica has 90% of t he world s plat inum, 80% of it s
manganese, 75% of it s chrome and 41% of it s gold, as
well as vit al deposit s of diamonds, vanadium and coal.
The 1886 gold rush led t o many mining and f inancing
companies opening up, and t o cat er f or t heir needs, t he
Johannesburg St ock Exchange (JSE) opened in 1887.
Over t he years since 1900, t he Sout h Af rican equit y
market has been one of t he world s most successf ul,
generat ing real equit y ret urns of 7. 3% per year, t he
second- highest ret urn among t he Yearbook count ries.
Today, Sout h Af rica is t he largest economy in Af rica,
wit h a sophist icat ed f inancial st ruct ure. Back in 1900,
Sout h Af rica, t oget her wit h several ot her Yearbook
count ries, would have been deemed an emerging
market . According t o index compilers, it has not yet
emerged, and it t oday ranks as t he f if t h- largest
emerging market .
Gold, once t he keyst one of Sout h Af rica s economy, has
declined in import ance as t he economy has diversif ied.
Resource st ocks, however, are well over a quart er of t he
JSE s market capit alizat ion. The largest JSE st ocks are
MTN, Sasol, and St andard Bank.

Capi t al market ret urns f or Sout h Af ri ca
t he long- t erm real ret urn on Sout h Af rican equit ies was an annualized
page 31.
Fi gur e 1
2,525
7.0
3.2
0
1
10
100
1,000
10,000
1900 10 20 30 40 50 60 70 80 90 2000 10
Fi gur e 2
5.8
6.5
6.2
1.5
6.9
5.5
3.9
7.8
- 10
- 5
0
5
10
20012010 19862010 19612010 19002010
Fi gur e 3
7.3
12.6
22.6
1.8
6.8
10.4
1.0
6.0 6.2
- 5
0
5
10
15
20
25



Spai n
Key to Latin
America
Spanish is t he most widely spoken int ernat ional
language af t er English, and has t he f ourt h- largest
number of nat ive speakers af t er Chinese, Hindi and
English. Part ly f or t his reason, Spain has a visibilit y and
inf luence t hat ext ends way beyond it s Sout hern
European borders, and carries weight t hroughout Lat in
America.
The modern st yle of Spanish bullf ight ing is described as
daring and revolut ionary, and t hat is an apt descript ion
of real equit y ret urns over t he cent ury. While t he 1960s
and 1980s saw Spanish real equit y ret urns enjoying a
bull market and ranked second in t he world, t he 1930s
and 1970s saw t he very worst ret urns among our
count ries.
Though Spain st ayed on t he sidelines during t he t wo
world wars, Spanish st ocks lost much of t heir real value
over t he period of t he civil war during 193639, while
t he ret urn t o democracy in t he 1970s coincided wit h t he
quadrupling of oil prices, height ened by Spain s
dependence on import s f or 70% of it s energy needs.
The Madrid St ock Exchange was f ounded in 1831 and it
is now t he 15t h largest in t he world, helped by st rong
economic growt h since t he 1980s. The major Spanish
companies ret ain st rong presences in Lat in America
combined wit h increasing st rengt h in banking and
inf rast ruct ure across Europe. The largest st ocks are
Telef onica, Banco Sant ander, and BBVA.

Capi t al market ret urns f or Spai n
t he long- t erm real ret urn on Spanish equit ies was an annualized 3. 6 %
page 31.
Fi gur e 1
49
4.1
1.5
0
1
10
100
1900 10 20 30 40 50 60 70 80 90 2000 10
Fi gur e 2
4.1
3.2
1.3
4.6
3.4
2.3
6.7
2.9
- 10
- 5
0
5
10
20012010 19862010 19612010 19002010
Fi gur e 3
3.6
9.6
22.3
1.3
7.2
11.8
0.3
6.2
5.9
- 5
0
5
10
15
20
25



Sweden
Nobel prize
returns
Alf red Nobel bequeat hed 94% of his t ot al asset s t o
est ablish and endow t he f ive Nobel Prizes (f irst awarded
in 1901), inst ruct ing t hat t he capit al be invest ed in saf e
securit ies. Were Sweden t o win a Nobel prize f or it s
invest ment ret urns, it would be f or it s achievement as
t he only count ry t o have real ret urns f or equit ies, bonds
and bills all ranked in t he t op t hree.
Real Swedish equit y ret urns have been support ed by a
policy of neut ralit y t hrough t wo world wars, and t he
benef it s of resource wealt h and t he development , in t he
1980s, of indust rial holding companies. Overall, t hey
have ret urned 6. 3% per year, behind t he t wo highest -
ranked count ries, Aust ralia and Sout h Af rica.
The St ockholm st ock exchange was f ounded in 1863
and is t he primary securit ies exchange of t he Nordic
count ries. Since 1998, has been part of t he OMX
grouping. The largest SSE st ocks are Nordea Bank,
Ericsson, and Svenska Handelsbank.
Despit e t he high rankings f or real bond and bill ret urns,
current Nobel prize winners will rue t he inst ruct ion t o
invest in saf e securit ies as t he real ret urn on bonds was
only 2. 4% per year, and t hat on bills only 1. 9% per
year. Had t he capit al been invest ed in domest ic equit ies,
t he winners would have enjoyed immense f ort une as
well as f ame.

Capi t al market ret urns f or Sweden
t he long- t erm real ret urn on Swedish equit ies was an annualized 6. 3 %
page 31.
Fi gur e 1
903
14.6
8.1
0
1
10
100
1,000
1900 10 20 30 40 50 60 70 80 90 2000 10
Fi gur e 2
6.1
4.3
0.3
3.1
4.8
3.8
6.9
2.9
- 10
- 5
0
5
10
20012010 19862010 19612010 19002010
Fi gur e 3
6.3
10.1
22.9
2.4
6.1
12.4
1.9
5.5
6.8
- 5
0
5
10
15
20
25



Swi t zerl and
Traditional
safe haven
For a small count ry wit h just 0. 1% of t he world s
populat ion and 0. 008% of it s land mass, Swit zerland
punches well above it s weight f inancially and wins
several gold medals in t he global f inancial st akes. In t he
Global Compet it iveness Report 20102011, Swit zerland
is t op ranked in t he world.
The Swiss st ock market t races it s origins t o exchanges
in Geneva (1850), Zurich (1873) and Basel (1876). It is
now t he world s eight h- largest equit y market ,
account ing f or 3. 0% of t ot al world value.
Since 1900, Swiss equit ies have achieved a mid- ranking
real ret urn of 4. 2%, while Swit zerland has been one of
t he world s t hree best - perf orming government bond
market s, wit h an annualized real ret urn of 2. 1%.
Swit zerland has also enjoyed t he world s lowest inf lat ion
rat e: just 2. 3% per year since 1900. Meanwhile, t he
Swiss f ranc has been t he world s st rongest currency.
Swit zerland is, of course, one of t he world s most
import ant banking cent ers, and privat e banking has been
a major Swiss compet ence f or over 300 years. Swiss
neut ralit y, sound economic policy, low inf lat ion and a
st rong currency have all bolst ered t he count ry s
reput at ion as a saf e haven. Today, close t o 30% of all
cross- border privat e asset s invest ed worldwide are
managed in Swit zerland.
Swit zerland s list ed companies include world leaders
such as Nest le, Novart is and Roche.

Capi t al market ret urns f or Swi t zerl and
t he long- t erm real ret urn on Swiss equit ies was an annualized 4. 2% as
page 31.
Fi gur e 1
100
10.1
2.4
0
1
10
100
1,000
1900 10 20 30 40 50 60 70 80 90 2000 10
Fi gur e 2
- 4.2
4.1
3.4
2.4 2.1 2.1
4.6
- 0.8
- 10
- 5
0
5
10
20012010 19862010 19612010 19002010
Fi gur e 3
4.2
6.6
19.8
2.1
4.5
9.3
0.8 3.1
5.0
- 5
0
5
10
15
20
25



Uni t ed Ki ngdom
Global
center
Organized st ock t rading in t he UK dat es f rom 1698.
This most ly t ook place in Cit y of London cof f ee houses
unt il t he London St ock Exchange was f ormally
est ablished in 1801. By 1900, t he UK equit y market
was t he largest in t he world, and London was t he
world s leading f inancial cent er, specializing in global
and cross- border f inance.
Early in t he 20t h cent ury, t he US equit y market overt ook
t he UK, and nowadays, bot h New York and Tokyo are
larger t han London as f inancial cent ers. What cont inues
t o set London apart , and just if ies it s claim t o be t he
world s leading int ernat ional f inancial cent er, is t he
global, cross- border nat ure of much of it s business.
Today, London is ranked as t he t op f inancial cent re in
t he Global Financial Cent res Index, Worldwide Cent res
of Commerce Index, and Forbes ranking of powerf ul
cit ies. It is t he world s banking cent er, wit h 550
int ernat ional banks and 170 global securit ies f irms
having of f ices in London. The London f oreign exchange
market is t he largest in t he world, and London has t he
world s t hird- largest st ock market , t hird- largest
insurance market , and eight h- largest bond market .
London is t he world s largest f und management cent er,
managing almost half of Europe s inst it ut ional equit y
capit al, and t hree- quart ers of Europe s hedge f und
asset s. More t han t hree- quart ers of Eurobond deals are
originat ed and execut ed in London. More t han a t hird of
t he workld s swap t ransact ions and more t han a quart er
of global f oreign exchange t ransact ions t ake place in
London, which is also a major cent er f or commodit ies
t rading, shipping, and many ot her services.

Capi t al market ret urns f or t he Uni t ed Ki ngdom
t he long- t erm real ret urn on UK equit ies was an annualized 5. 3 % as
page 31.
Fi gur e 1
317
4.6
3.1
0
1
10
100
1,000
1900 10 20 30 40 50 60 70 80 90 2000 10
Fi gur e 2
4.5
4.3
- 1.3
1.0
3.4
3.9
3.4
- 0.1
- 10
- 5
0
5
10
20012010 19862010 19612010 19002010
Fi gur e 3
5.3
9.5
20.0
1.4
5.4
13.7
1.0
5.0
6.4
- 5
0
5
10
15
20
25



Uni t ed St at es
Financial
superpower
In t he 20t h cent ury, t he Unit ed St at es rapidly became
t he world s f oremost polit ical, milit ary, and economic
power. Af t er t he f all of communism, it became t he
world s sole superpower.
The USA is also a f inancial superpower. It has t he
world s largest economy, and t he dollar is t he world s
reserve currency. It s st ock market account s f or 41% of
t ot al world value, which is over f ive t imes as large as
Japan, it s closest rival. The USA also has t he world s
largest bond market .
US f inancial market s are also t he best document ed in
t he world and, unt il recent ly, most of t he long- run
evidence cit ed on hist orical asset ret urns drew almost
exclusively on t he US experience. Since 1900, US
equit ies and US bonds have given real ret urns of 6. 3%
and 1. 8%, respect ively.
There is an obvious danger of placing t oo much reliance
on t he excellent long run past perf ormance of US
st ocks. The New York St ock Exchange t races it s origins
back t o 1792. At t hat t ime, t he Dut ch and UK st ock
market s were already nearly 200 and 100 years old,
respect ively. Thus, in just a lit t le over 200 years, t he
USA has gone f rom zero t o a 41% share of t he world s
equit y market s.
Ext rapolat ing f rom such a successf ul market can lead t o
success bias. Invest ors can gain a misleading view of
equit y ret urns elsewhere, or of f ut ure equit y ret urns f or
t he USA it self . That is why t his Yearbook f ocuses on
global ret urns, rat her t han just t hose f rom t he USA.

Capi t al market ret urns f or t he Uni t ed St at es
t he long- t erm real ret urn on US equit ies was an annualized 6. 3 % as
page 31.
Fi gur e 1
851
7.5
2.9
0
1
10
100
1,000
1900 10 20 30 40 50 60 70 80 90 2000 10
Fi gur e 2
- 3.9
4.4
5.3
0.9
2.6
4.4
5.5
0.3
- 10
- 5
0
5
10
20012010 19862010 19612010 19002010
Fi gur e 3
6.3
9.4
20.3
1.8
4.8
10.2
1.0 3.9 4.7
- 5
0
5
10
15
20
25



Worl d
Globally
diversified
It is int erest ing t o see how t he 19 Yearbook count ries
have perf ormed in aggregat e over t he long run. We have
t heref ore creat ed a 19- count ry world equit y index
denominat ed in a common currency, in which each
count ry is weight ed by it s st art ing- year equit y market
capit alizat ion, or in years bef ore capit alizat ions were
available, by it s GDP. We also comput e a 19- count ry
world bond index, wit h each count ry weight ed by GDP.
These indexes represent t he long- run ret urns on a
globally diversif ied port f olio f rom t he perspect ive of an
invest or in a given count ry. The chart s opposit e show
t he ret urns f or a US global invest or. The world indexes
are expressed in US dollars; real ret urns are measured
relat ive t o US inf lat ion; and t he equit y premium versus
bills is measured relat ive t o US t reasury bills.
Over t he 111 years f rom 1900 t o 2011, Figure 1 shows
t hat t he real ret urn on t he world index was 5. 5% per
year f or equit ies, and 1. 6% per year f or bonds. It also
shows t hat t he world equit y index had a volat ilit y of
17. 7% per year. This compares wit h 23. 4% per year f or
t he average count ry and 20. 3% per year f or t he USA.
The risk reduct ion achieved t hrough global diversif icat ion
remains one of t he last f ree lunches available t o
invest ors.

Capi t al market ret urns f or Worl d (i n USD)
f or bonds and 2. 9 f or US bills. Figure 2 shows t hat , since 1 900,
equit ies beat bonds by 3. 8% and US bills by 4. 5 % per year. Figure 3
shows t hat t he long- t erm real ret urn on World equit ies was an
annualized 5. 5% as compared t o bonds and US bills, which gave a real
ret urn of 1. 6% and 1. 0% respect ively. For addit ional explanat ions of
t hese f igures, see page 31.
Fi gur e 1
375
6.1
2.9
0
1
10
100
1,000
1900 10 20 30 40 50 60 70 80 90 2000 10
Equities Bonds US Bills
Fi gur e 2
- 4.0
4.0
4.5
- 0.8
1.2
3.8
4.5
1.5
- 10
- 5
0
5
10
20012010 19862010 19612010 19002010
Premium vs Bonds (% p.a.) Premium vs US Bills (% p.a.)
Fi gur e 3
5.5
8.6
17.7
1.6
4.7
10.4
1.0 3.9 4.7
- 5
0
5
10
15
20
25



Worl d ex-US
Rest of the
world
In addit ion t o t he t wo world indexes, we also const ruct
t wo world indexes t hat exclude t he USA, using exact ly
t he same principles. Alt hough we are excluding just one
out of 19 count ries, t he USA account s f or roughly half
t he t ot al equit y market capit alizat ion of our 19 count ries,
so t he 18- count ry world ex- US equit y index represent s
approximat ely half t he t ot al value of t he world index.
We not ed above t hat , unt il recent ly, most of t he long-
run evidence cit ed on hist orical asset ret urns drew
almost exclusively on t he US experience. We argued
t hat f ocusing on such a successf ul economy can lead t o
success bias. Invest ors can gain a misleading view of
equit y ret urns elsewhere, or of f ut ure equit y ret urns f or
t he USA it self .
The chart s opposit e conf irm t his concern. They show
t hat , f rom t he perspect ive of a US- based int ernat ional
invest or, t he real ret urn on t he world ex- US equit y index
was 5. 0% per year, which is 1. 3% per year below t hat
f or t he USA. This suggest s t hat , alt hough t he USA has
not been a massive out lier, it is nevert heless import ant
t o look at global ret urns, rat her t han just f ocusing on t he
USA.

Capi t al market ret urns f or Worl d ex-US (i n USD)
shows t hat t he long- t erm real ret urn on World ex- US equit ies was an
Fi gur e 1
235
3.8
2.9
0
1
10
100
1,000
1900 10 20 30 40 50 60 70 80 90 2000 10
Fi gur e 2
4.1 4.0
- 3.2
- 1.5
0.5
3.8
4.2
2.9
- 10
- 5
0
5
10
20012010 19862010 19612010 19002010
Fi gur e 3
5.0
8.2
20.4
1.2
4.2
14.2
1.0 3.9 4.7
- 5
0
5
10
15
20
25



Europe
The Old
World
The Yearbook document s invest ment ret urns f or 13
European count ries. They comprise eight euro currency
area st at es (Belgium, Finland, France, Germany,
Ireland, It aly, t he Net herlands and Spain) and f ive
European market s t hat are out side t he euro area
(Denmark, Sweden and t he UK; and f rom out side t he
EU, Norway and Swit zerland). Loosely, we might argue
t hat t hese 13 count ries represent t he Old World.
It is int erest ing t o assess how well European count ries
as a group have perf ormed, compared wit h our world
index. We have t heref ore const ruct ed a 13- count ry
European index using t he same met hodology as f or t he
world index. As wit h t he world index, t his European
index can be designat ed in any desired common
currency. For consist ency, t he f igures opposit e are in
US dollars f rom t he perspect ive of a US int ernat ional
invest or.
Figure 1 opposit e shows t hat t he real equit y ret urn on
European equit ies was 4. 8%. This compares wit h 5. 5%
f or t he world index, indicat ing t hat t he Old World
count ries have underperf ormed. This may relat e t o t he
dest ruct ion f rom t he t wo world wars, where Europe was
at t he epicent er; or t o t he f act t hat many of t he New
World count ries were resource- rich; or perhaps t o t he
great er vibrancy of New World economies.

Capi t al market ret urns f or Europe (i n USD)
shows t hat t he long- t erm real ret urn on European equit ies was an
Fi gur e 1
175
2.5
2.9
0
1
10
100
1,000
1900 10 20 30 40 50 60 70 80 90 2000 10
Fi gur e 2
4.5
3.8
- 3.9
0.5
1.2
3.9
6.2
2.5
- 10
- 5
0
5
10
20012010 19862010 19612010 19002010
Fi gur e 3
4.8
7.9
21.5
0.8 3.8
15.3
1.0 3.9 4.7
- 5
0
5
10
15
20
25



Elroy Dimson
Elroy Dimson is Emeritus Professor of Finance at London
Business School, where he has been a Governor, Chair of the
Finance and Accounting areas, and Dean of the MBA and
EMBA programs. He chairs the Strategy Council of the
Norwegian Government Pension Fund Global, and is a
member of the investment committees of Guy s & St Thomas
Charity, London University, and UnLtd The Foundation for
Social Entrepreneurs. He is a Director and Past President of
the European Finance Association and is an elected member of
the Financial Economists Roundtable. He has been appointed
to Honorary Fellowships of Cambridge Judge Business School,
the Society of Investment Professionals, and the Institute of
Actuaries. He 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
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 Dean of the Finance Programmes,
including the Masters in Finance. He has advised on several
public enquiries; is currently Chairman of Aberforth Smaller
Companies Trust; was previously a non- executive director of
M&G Group 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. With Elroy Dimson, he co- designed the
FTSE 100- Share Index and the RBS Hoare Govett Smaller
Companies Index, produced since 1987 at London Business
School. His PhD in Finance is from London Business School.
Mike Staunton
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 f or
Wilmott magazine. He has had articles published in Journal of
Banking & Finance, Financial Analysts Journal, and Journal of
the Operations Research Society. With Elroy Dimson and Paul
Marsh, he co- authored the influential investment book Triumph
of the Optimists, published by Princeton University Press, which
underpins this Yearbook and the accompanying Credit Suisse
Global Investment Returns Sourcebook 2011. His PhD in
Finance is from London Business School.

David Holland
David Holland is a Senior Advisor to Credit Suisse. He was
previously co- Head of HOLT Valuation & Analytics, the
research and development arm of HOLT. He was responsible
for improvements to the HOLT CFROI framework, the
development of custom solutions and investment products, and
the generation of HOLT content. Mr Holland joined Credit
Suisse First Boston in May 2002 from Fractal Value Advisors, a
corporate strategy and valuation advisory business he owned in
South Africa. He has worked with the world s leading fund
management firms on designing investment decision processes;
advised corporations and private equity firms on strategy and
valuation; and counselled the South African Reserve Bank on
market expectations. He co- authored the book Beyond
Earnings: A User s Guide to Excess Return Models and the
HOLT CFROI Framework with Tom Larsen, published by
Wiley Finance. Mr Holland holds degrees in Chemical
Engineering from the University of Illinois (BS) and Stanford
University (MS), and an MBA at the University of Cape Town.
Bryant Matthews
Bryant Matthews is the Director of Research at Credit Suisse,
HOLT Division. He joined Credit Suisse in January 2002 when
the firm acquired HOLT Value Associates LP. He has acted as
consultant for various banks and professional bodies in the field
of finance, and designed numerous valuation frameworks for
Institutional Investors. Research conducted by Mr Matthews and
his team has resulted in many significant insights into
understanding the link between corporate performance and
stock price. Areas of recent investigation include empirical
research on corporate fade dynamics, estimating discount rates
through a market derived approach, and the development of risk
models useful in understanding how risk evolves over time. Mr
Matthews is an MBA graduate of Northwestern Kellogg
Graduate School of Management.

About the authors
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C
E

!
5
4
5
5
3
4

l
S
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N

9
7
8
-
3
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9
5
2
3
5
!
3
-
4
-
5
0
2
/
2
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!
!
A|so pub||shed by the Pesearch Inst|tute
The power of
brand |nvest|ng
Fobruury 20!0
G|oba| Wea|th
Peport
Ocobor 20!0
Emerg|ng
Consumer
Survey 2011
Junuury 20!!
Country
Indebtedness.
An Update
Junuury 20!!
Cred|t Su|sse
G|oba| Investment
Peturns
Yearbook 2010
Fobruury 20!0
The wor|d post the
cred|t cr|s|s
Sopombor 2009
Water. The next
cha||enge
Noombor 2009
Cred|t Su|sse
G|oba| Investment
Peturns
Yearbook 2009
Fobruury 2009
Intang|b|e
|nfrastructure.
The key to growth
Docombor 2008
Country
|ndebtedness.
Part 1
Junuury 20!0

Credit Suisse Global Investment Yearbook 2011

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