An investment in the Australia equity market has been remarkably consistent over the past 100 years. Investors can expect a total return of around 10 per cent long term
A paper in the latest Reserve Bank Bulletin is based on data constructed from historical stock exchange gazettes, allowing for the construction of long-run analytical series on equity markets.
Share prices of the top 100 listed companies have increased by an average of around 6 per cent a year over the past 100 years. After accounting for inflation the average increase is around 2 per cent.
When dividends are included to give a total return, the nominal return on equities has been around 10 per cent a year over the past 100 years. After inflation, the return was about 6 per cent a year.
Over the same period the nominal return on long-term government bonds has been around 6 per cent, giving shares an excess return (or risk premium) of around 4 per cent over the long term.
Different sectors have had similar performance, although there have been periods of over and underperformance. Banking stocks underperformed for several decades following the depression, while resources stocks outperformed the rest of the market in the late 1960s and then did poorly afterwards.
Listed company profits have grown by an average of average 10 per cent a year since 1937, generally tracking GDP growth for most of the period.
There are a few significant exceptions to this relationship. In the 1940s earnings fell even as GDP increased, probably reflecting the effects of wartime mobilisation of the Australian economy. In the 1990s earnings outstripped GDP substantially.
On average, from 1917 to the present around 65 per cent of listed company earnings were paid back to investors in the form of dividends.
Dividend yields were up around 6 to 7 per cent during the early part of the 20th century. Yields trended down through the century as share price growth outpaced dividends. Currently, the S&P/ASX dividend yield is 4.5 per cent.
The composition of the market has not changed all that much over time. It has always been dominated by resources companies and banks. The ‘other’ sector used to be dominated by manufacturers, consumer goods and infrastructure companies.
The long-term average price-to-earnings ratio is 15 per cent, which is roughly where it is now. The current PE ratio for the top 100 stocks is within 10 basis points of its average since 1937.
“Given that interest rates are low, we might expect price-to-earnings ratios to be above average, since the present value of discounted future earnings will be higher with lower discount rates,” the paper says.
On the issue of volatility, the paper says that volatility in Australian equity prices is currently considered to be very low relative to history. “But a onger perspective shows that volatility has probably been above average since the 1970s and the current level remains above historical troughs.”
Generally, when market volatility has been low shares of different stocks mostly move independently but when volatility is high stocks have tended to move together.