Analysts predict era of low returns

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The high capital returns investors were able to earn from gilts and equities in the 1980s and early 1990s are a thing of the past, the investment bank BZW said yesterday. They are likely to be replaced by a new era of lower returns in which income , not capital growth, is the dominant driver of returns to investors.

In its annual study of the long-term trends in equity and gilts prices, BZW said that the recent 10-year returns from all three asset classes - gilts, equities and cash - had been "quite exceptional" by historical standards.

They were now likely to return to levels more typical of the past. The high returns - driven by large capital gains - from gilts and equities between 1981 and 1993 came to an abrupt halt last year. In 1994 both types of investment produced negative returns, of 13.8 per cent and 6.8 per cent respectively, making it one of the worst years for investors since the 1973-75 bear market. Those who stuck with cash did best.

According to Michael Hughes, BZW's head of economics and strategy, last year is likely to prove a turning point in the stock and gilts market cycle, bringing to a close what has been the most lucrative decade for investors since the period between 1920 and 1934.

"It is unlikely that the next 10-year period will be as rewarding to investors", he said, even though he believed that the bond market crash in particular last year had been overdone. He expected bond yields to return to their end-1993 level as investorscontinue to adjust to the new era of low inflation.

According to BZW's analysis, long-run historical trends suggest that gilt yields tend to fall sharply in periods of low inflation.

If the financial markets can be convinced that the Government can meet its 1-4 per cent inflation target, then yields could fall from their current levels - around 8.5 per cent - to around 5.5 per cent, Dr Hughes said.