FTSE 100 index 'unlikely to see 6,900 level again for 15 years'

The FTSE 100 is unlikely to claw its way back to its peak until 2018, a depressing new study suggested yesterday.

In an examination of world stock market data since the start of the 20th century, professors from the London Business School argue that pension funds and other investors are still showing signs of "irrational optimism" about the prospects for share prices.

The authors, professors Elroy Dimson and Paul Marsh, caution against expecting a strong rebound in the stock market this year and argue it is possible future returns from shares could be negative even on a 20-year view.

Professor Dimson said the current bear market – which has wiped £8,000bn from the value of global stock markets – was only the third worst on record. "It is worth reminding ourselves that things are not so bad that they couldn't be worse," he said.

The FTSE 100 peaked at 6,930.2 at the end of 1999 and has lost nearly half its value since then, despite a rebound of 88.6 points to 3,678.7 yesterday. Even if returns average 8 per cent a year over the coming decades, there will be many individual years which fall below that figure. The professors calculate that the chances of the index having regained its peak by 2018 are only 50-50 and it may take several years longer.

Professor Dimson – who, with Professor Marsh, designed the FTSE 100 index in 1984 – said it was wrong to assume that three years of falling markets are likely to be followed by a rally. An analysis of data from 16 major stock markets over the past 103 years shows no evidence to support the view.

"The chances of a down year are about the same after a down year as after an up year or a sideways year," he said. "The market has no memory. The market spins the roulette wheel afresh each year."

The London Business School/ABN Amro analysis shows that, in the 20th century, there has not been a 20-year period in which US shares have shown a negative return, when dividends are included. This is not true for the UK.

Professor Dimson said: "Equities are not just risky in the short term, they are risky over the long term, too. Twenty years is not a magic number. You have to hold for a very long time to be confident that equities will outperform."

But the study does not make comforting reading for investors in the US – if anything, it makes blacker predictions for the US market. That country's positive 20-year returns came on the back of its growth into the world's economic superpower, a phenomenal expansion in its stock market that cannot be repeated in the coming century.

Professor Marsh set out his view that investors and pension-planners, particularly in the US, are still irrationally optimistic about future returns.

Under the new accounting standard FRS 17, UK companies are obliged to set out assumptions of equity market returns used to calculate the funding requirements of their pension schemes. Professor Marsh said that, "based on eyeballing these numbers, projections in the UK appear to be a tiny bit optimistic, but not as bad as the US where annual return assumptions are 50 or 60 per cent higher.

"Companies believe that if they hang on for 10 or 15 years everything will turn out all right. Many US companies are putting in wildly optimistic rates of return assumptions, and these are giving a completely false sense of security."