Outlook: Madness of crowds

IT IS a feature of global investment return year books - the latest of which was published yesterday by ABN Amro and the London Business School - that they tend only to confirm the blindingly obvious. Yet filled with fascinating facts and figures, they are no less interesting for it. ABN Amro's chief "new" finding from analysing the long-term rates of return on equities in 17 national stock markets is that rapid economic growth is rarely accompanied by correspondingly impressive stock market performance.

So beware of all those climbing aboard the Chinese development story bandwagon by advertising the virtues of their Far Eastern funds. It just ain't true to think that an economy growing at a very rapid rate will see an equally rapid rise in profits, dividends and returns to investors. The study finds that long-term dividend growth is in fact below per capita economic growth in all countries, but this is particularly the case in fast-growing emerging markets.

There are two likely explanations for this. One is that as economies play catch up, it is only natural and fair that most of the spoils will go to previously deprived populations, not to those providing the capital. The other is that growth economies tend to attract an oversupply of capital, which means that returns fall correspondingly.

The study also confirms that this year's star sector is quite likely to be next year's worse performer, and visa versa. Another finding is that micro-stocks, accounting for less than 1 per cent of the market, tend as a group substantially to outperform small and large caps.

And then there's reconfirmation of the oldest truism of all. Equities over time will always hugely outperform other asset classes. Wait long enough and the massive deficits that are a current feature of our beleaguered pensions industry will disappear. Unfortunately the law now requires trustees to seek immediate means to plug the gap, which quite apart from damaging the profits of the sponsoring company, generally involves dumping cheaply priced equities for expensively priced bonds. Somewhere along the way we seem to have lost sight of common sense.

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