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IPE special report May 2018

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US equities record worst deficit since depression


US/UK - US equities experienced their widest negative margin against bonds since the great depression of the 1930s last year - returning a deficit of 30.4% less than fixed-income securities, according to the annual Equity Gilt Study by Barclays Capital, the investment banking division of Barclays.

The story for UK equities was similar – albeit slightly less drastic – under-performing gilts by 14.7% in 2000 - the ninth worst deficit in 101 years.

Barclays says the figures marked corrections in equity risk premium in both markets.
In the US, one measure of equity risk premium – the 10-year rolling average of equity total returns minus bond total returns – fell to 7%, from the historically elevated level of 8.8%.
In the UK the average annual excess return from equities compared to gilts – the ex-post equity risk premium - dropped to 2.4% for the last decade, compared to an overall average of 4.4%.

The report also suggests that British corporate bonds will out-number UK government gilts in the market some time this year, pointing out that at the end of last year non-gilts made up 46.5% of Barclays’ sterling bond index.

The index, which goes back ten years, also shows non-gilt bonds giving higher returns than UK gilts throughout the 1990s. Looking at different rating bands it can be seen that the total returns of A and BBB rated corporate bonds are superior over the ten year period, with triple-Bs even out-performing equities in the UK.

“ However, it is worth being aware that the market capitalisation of BBBs was less than £1bn (e1.6bn) in 1991, and by 1997 it reached £5bn,” says Jim Reid of Barclays Capital.

The British corporate bond market as a whole, especially bonds issued by highly rated companies, has grown dramatically in size in the last few years. The AAA corporate bond market stands now at almost £85bn, a fourfold increase from the beginning of 1997.

“ The massive reduction in government bonds in the last few years and the need for an alternate asset class has increased the capitalisation of AAAs,” notes Reid.

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