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2012 Study

The Equity Gilt Study has been published continuously since 1956, providing data, analysis and commentary on long-term asset returns in the UK and US. This publication provides a uniquely long and consistent database: the UK database goes back to 1899, while the US data – provided by the Centre for Research in Security Prices at the University of Chicago – begins in 1925.

The Equity Gilt Study is also noteworthy for its focus on long-term market trends. Chapter 1 investigates the unusually high equity risk premia that have been prevalent for the past decade, and that have become more pronounced over the past year. We find that they reflect unusually low risk-free bond yields – which have become negative in inflation-adjusted terms in most developed countries – rather than extraordinarily low equity valuations. It seems that an important cause of these low yields is a scarcity in risk-free assets that is not likely to be reversed any time soon. While positive outcomes such as a stronger economic recovery and a restoration of confidence in euro area sovereign debt would lift equity prices and reduce equity risk premia, risk-free yields are likely to remain low and equity premia high relative to historic norms for a number of years. In Chapter 2, we address the vulnerability of the US, UK and Japan to contagion from the euro area debt crisis. The debt and deficits of these countries are of similar magnitude to euro area countries such as Spain and Italy. However, the US, UK and Japan enjoy institutional advantages such as monetary sovereignty, flexible exchange rates and reserve currency status that offer a degree of insulation from the corrosive market dynamics that we have seen play out in the euro area. That said, th ese institutional advantages merely buy time, and all three countries will have to take significant action to restore fiscal sustainability over the next decade or face adverse economic and market consequences. Chapter 3 takes a close look at the evolution of the Chinese economy. We do not foresee a hard landing, but instead project a gradual shift toward a slower, more sustainable growth rate that de-emphasizes trade, construction and investment and instead places a greater weight on consumer spending…

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