Long-term investment data analysis shows Kiwi returns above world average
The Global Investment Returns Yearbook (GIRY) was first published in 2000 for Dutch banking giant ABN Amro by London Business School professors Elroy Dimson, Paul Marsh and Mike Staunton (DMS).
The core of the publication is the long-term investment return data from 1900 to 2009 of short-term government bills, long-term government bonds, shares, inflation and exchange rates, for 19 of the world's largest stockmarkets.
The book is the global authority on long-run investment returns and foreign exchange performance and is now sponsored by Credit Suisse.
Besides confirming that in the long run shares outperform bonds which in turn outperform short-term bills, and thus helping us to keep the faith with equities at the depths of bear markets, the GIRY each year provides a detailed analysis of one or two key investment themes.
This year the GIRY looks at why emerging markets might not be great value at present and why rates of high economic growth don't necessarily translate into good stockmarket returns. Commonsense, unbiased research for Mum and Dad.
Each year the trio endeavour to add a country or two to the book to improve its scope and representation of global equity markets. In the 2010 edition covering 1900 to 2009, Finland and New Zealand were added.
This is a reasonably big deal for the New Zealand financial market as inclusion in the GIRY confers some legitimacy on a market in terms of its longevity and the availability of data.
In addition it means that investors from all over the world can compare New Zealand's ultra long-term performance in shares, bonds, bills, inflation and exchange rates with the 18 other major developed countries in the year book.
The GIRY with 19 countries now covers 85 per cent of the world stockmarket by value. Notable exceptions are China and Russia.
Investors in these markets were completely wiped out by communist revolutions, and not just share investors - government bond investors lost everything, too.
Claims are still being made by investors on the Chinese and Russian governments to get them to honour their debts. China apparently defaulted on the sum of US$150 billion of government bonds in the late 1940s and a court case relating to this issue is ongoing.
DMS created a new index for New Zealand shares weighted according to the value of each company and including dividends for the period 1900 to 1928, then linked this data to existing indices including the NZSE gross index from 1987.
Back in 1900 the five biggest companies on the then Wellington Stock Exchange and their weightings in the index were Waihi Mining, at 40 per cent by far the biggest listed company, then Union Steamship at 7.2 per cent, Waitekauri Mining (3.7 per cent), NZ Insurance (3.6 per cent) and National Bank of New Zealand (3.2 per cent).
DMS advise that the dividend yield of the New Zealand stock market in 1900 was just 2.1 per cent, versus 5.7 per cent at the end of 2009.
The biggest reason for the low yield in 1900 was the predominance of mining companies in the index. Waihi Mining, although accounting for almost half of the index, was paying no dividend in 1900 despite having an 11.00 share price.
So how do we compare to the rest of the world? The table sets out the numbers for New Zealand, the US, Europe and Australia.
Despite Kiwis' current preoccupation with residential property, New Zealand shares have done pretty well, returning, an average of 9.8 per cent a year in the period 1900 to 2009. One dollar invested in New Zealand shares in 1900 would be worth $30,642 today, or $537.00 in real terms - that is, adjusted for inflation.
The way to think of this latter figure is that $1 invested in 1900 would buy $537 worth of goods at 1900 prices.
The drawback of this comparison is that a common currency is not being used; a weak currency would mean much higher returns in that local currency. For this reason real returns are a more relevant measure of performance as currency depreciation is usually associated with high levels of inflation, so after-inflation returns are likely to reflect the impact of a weak currency.
On the basis of real returns, the US edges out New Zealand with a 6.2 per cent real return versus 5.9 per cent. New Zealand's inflation over the period, at 3.7 per cent a year, is well above that of the US at 3.0 per cent, and this is probably the reason why, since 1900, the New Zealand dollar has fallen against the greenback at rate of about 1.0 per cent a year.
The long-term weakness of the kiwi suggests that if gold makes sense to US dollar holders worried about the debasement of their currency, it makes especially good sense to New Zealanders given that the kiwi has fallen significantly against the US dollar. But who knows what the future holds - in the next 100 years the New Zealand dollar might rise against the US dollar.
Despite the weaker kiwi, our stock market's long-term real return of 5.9 per cent a year is considerably better than the world average (5.4 per cent), much better than Europe at 4.8 per cent, but behind the US at 6.2 per cent.
The honour, however, of best-performing market in the GIRY goes to Australia, with an average compound real return of 7.5 per cent a year. A dollar invested in Australian shares in 1900 would be worth $2850 today in real terms.
Of the 19 countries in the GIRY, New Zealand's real return ranks us fifth, with just Australia, South Africa, Sweden and the US ahead. Note the strong returns from New Zealand short-term government bills - at 5.5 per cent, returns from New Zealand bills are 1.6 per cent higher than the world average.
DMS advise that on the basis of real short-term government bill returns, New Zealand ranks third out of the sample of 19 countries.
Looking at the data in another way, and specifically the 1985 to 2009 period, while shares are supposed to outperform short-term government bills by a handsome margin due to their higher risk, in New Zealand in this period shares underperformed government bills by an extraordinary 2.0 per cent a year.
The average for the world in the same period is a more normal 5.1 per cent a year outperformance of bills by shares. Our Reserve Bank's preoccupation with fighting inflation has meant that New Zealand has had very high short-term interest rates up until recently compared to the rest of the world. Naturally this means less of an incentive to own shares.
In the GIRY the professors give each country a subtitle: Australia is "the lucky country", the US is "financial superpower". New Zealand is described as "purity and integrity".
The New Zealand page of their publication reads: "For a decade, New Zealand has been promoting itself to the world as "100 per cent pure" and Forbes calls this marketing drive one of the world's top 10 travel campaigns. But the country also prides itself on honesty, openness, good governance and freedom to run businesses.
"According to Transparency International, New Zealand is perceived as the least corrupt country in the world. The Wall Street Journal ranks New Zealand as the best in the world for business freedom."
I guess we can count ourselves lucky that the book doesn't have a separate section for finance company debentures as that local sector's performance in terms of "honesty, openness and good governance" could well have meant quite a different perception of New Zealand.
* Brent Sheather is an Auckland stockbroker/financial adviser and his adviser/disclosure statement is available on request and free.
