long-run equity returns 1. in the long run total return on equities approximates to initial dividend...

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Long-run equity returns 1. In the long run total return on equities approximates to initial dividend yield plus growth rate of dividends and growth rate of dividends is dominated by growth rate of national output. Economic growth is fundamental to the capital gains that make equities attractive relative to higher-yielding investments, such as bonds, convertibles or property.

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Page 1: Long-run equity returns 1. In the long run total return on equities approximates to initial dividend yield plus growth rate of dividends and growth rate

Long-run equity returns 1.

• In the long run total return on equities approximates to initial dividend yield plus growth rate of dividends and growth rate of dividends is dominated by growth rate of national output.

• Economic growth is fundamental to the capital gains that make equities attractive relative to higher-yielding investments, such as bonds, convertibles or property.

Page 2: Long-run equity returns 1. In the long run total return on equities approximates to initial dividend yield plus growth rate of dividends and growth rate

Long-run equity returns 2.

• Assume the following:-• 1. Productivity growth 1 1/4% a year • 2. Employment contracting by 1/2% a year• 3. Ratio of profits to GDP falling by 0.2% a year• Then, what is the trend rate of profits growth, and

so of long-run capital gains p.a. in real terms?

• Answer = 1/2% a year

Page 3: Long-run equity returns 1. In the long run total return on equities approximates to initial dividend yield plus growth rate of dividends and growth rate

Productivity growth in the Euro-zone 1996 - 2000

• 1996 1.1%

• 1997 1.6%

• 1998 1.2%

• 1999 0.9%

• 2000 1.3%

• 2001 1/2% ?

• Average growth rate of productivity is little more than 1% a year.

Page 4: Long-run equity returns 1. In the long run total return on equities approximates to initial dividend yield plus growth rate of dividends and growth rate

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

EU15 Productivity growth Trend line

SLOWING PRODUCTIVITY GROWTH IN THE EU

Page 5: Long-run equity returns 1. In the long run total return on equities approximates to initial dividend yield plus growth rate of dividends and growth rate

What do we mean by “Europe”? 1.

“Europe” is to be understood in avery broad geographical sense. Itincludes 38 countries most ofthem with population under 10m.and of little economic importance.Their total population in 2000was 807.3m and working-agepopulation was 537.7m.

o

Page 6: Long-run equity returns 1. In the long run total return on equities approximates to initial dividend yield plus growth rate of dividends and growth rate

What do we mean by “Europe”? 2

334222

150

102

81

55

66

42

59

39

59

38

58

39

0

100

200

300

400

500

600

700

800

Total population Population of working age

m.Italy

UnitedKingdomFrance

Turkey

Germany

RussianFederationOther

Page 7: Long-run equity returns 1. In the long run total return on equities approximates to initial dividend yield plus growth rate of dividends and growth rate

Europe’s demographic problems 2000-2030 1. Chart shows projected population of working age for Europe as a whole. Projection based on 1994 World Bank data

538551

537

514

490

500

510

520

530

540

550

560m.

2000 2010 2020 2030

Page 8: Long-run equity returns 1. In the long run total return on equities approximates to initial dividend yield plus growth rate of dividends and growth rate

Europe’s demographic problems 2000-2030 2. Chart shows projected falls in population of working age, 2000-2030,%. Projection based on 1994 World Bank data

-24.1

-21.5

-15.2-14.1 -13.6

-7.1-5.7

-4.0

-30.0

-25.0

-20.0

-15.0

-10.0

-5.0

0.0

Germany Italy Spain Netherlands BelgiumRussian

FederationUnited

Kingdom France

Page 9: Long-run equity returns 1. In the long run total return on equities approximates to initial dividend yield plus growth rate of dividends and growth rate

Europe’s demographic problems 2000-2030 3. Chart shows projected fall in population of working age in all those countrieswhere it is falling. Decline is about 1/2% a year.

436 435

415

388

360

370

380

390

400

410

420

430

440 m.

2000 2010 2020 2030

Page 10: Long-run equity returns 1. In the long run total return on equities approximates to initial dividend yield plus growth rate of dividends and growth rate

Europe’s demographic problems 2000-2030 4. Chart shows projected fall in population of working age in “falling” countries and rise in “rising” countries, between 2000 and 2030.

436 388

102 126

0

50

100

150

200

250

300

350

400

450m.

2000"Falling" countries

2030 2000"Rising" countries

2030

Page 11: Long-run equity returns 1. In the long run total return on equities approximates to initial dividend yield plus growth rate of dividends and growth rate

Another view: Latest UN assessment of change in Europe's working-age populations, 2000 - 2050

-45.1 -44.4 -44.1

-30.2

-22.4

-17.3 -16.1

-11.8

-50

-45

-40

-35

-30

-25

-20

-15

-10

-5

0

%

This assessment was made in 2000, after substantial migration - mostly from east to west in Europe - in the mid- and late 1990s.

Page 12: Long-run equity returns 1. In the long run total return on equities approximates to initial dividend yield plus growth rate of dividends and growth rate

WORKING-AGE POPULATION - W. EUROPE Latest UN projections of 15 - 59 age group

0

10000

20000

30000

40000

50000

60000

in '000s

2000

2050

Page 13: Long-run equity returns 1. In the long run total return on equities approximates to initial dividend yield plus growth rate of dividends and growth rate

THE LATEST ASSESSMENT 1.Population of working age in millions, according to 2002 World Bank projections

100

130

160

190

220

250m.

Eurozone, as at start 2002

EU-15

Page 14: Long-run equity returns 1. In the long run total return on equities approximates to initial dividend yield plus growth rate of dividends and growth rate

THE LATEST ASSESSMENT 2.

EU Eurozone2000 229.6 185.92010 230.0 185.72020 220.0 177.02030 199.1 159.12040 177.3 139.92050 167.4 130.8

Population of working age (millions)

Page 15: Long-run equity returns 1. In the long run total return on equities approximates to initial dividend yield plus growth rate of dividends and growth rate

0

1

2

3

4

5

6

World

EU-15

Replacement ratio

THE DECLINE IN FERTILITYChart shows number of births per woman, on average

Page 16: Long-run equity returns 1. In the long run total return on equities approximates to initial dividend yield plus growth rate of dividends and growth rate

1.0

1.5

2.0

2.5

3.0

3.5

EU-15 USA

Japan

INTERNATIONAL COMPARISONSNumber of births per woman, on average

Page 17: Long-run equity returns 1. In the long run total return on equities approximates to initial dividend yield plus growth rate of dividends and growth rate

LABOUR FORCE PARTICIPATION - Big differences between nations

0

10

20

30

40

50

60

70

80

90

%

Total participation ratio, of 15 - 64 years old, in 1999

Page 18: Long-run equity returns 1. In the long run total return on equities approximates to initial dividend yield plus growth rate of dividends and growth rate

PARTICIPATION IN LATE MIDDLE AGE

0

10

20

30

40

50

60

70

80

90

%

Participation ratio, men, 55 - 64, in 1999

Page 19: Long-run equity returns 1. In the long run total return on equities approximates to initial dividend yield plus growth rate of dividends and growth rate

0

20

40

60

80

100

Old dependency

Young dependency

Working age population

EU’S DEPENDENCY PATTERNEU15’s dependents as % of population

Page 20: Long-run equity returns 1. In the long run total return on equities approximates to initial dividend yield plus growth rate of dividends and growth rate

70

80

90

100

110

120

130

140%

THE OVER-BURDENED STATENumber of people aged 19 and under, and 60 and over, as a percentage of working age population

Page 21: Long-run equity returns 1. In the long run total return on equities approximates to initial dividend yield plus growth rate of dividends and growth rate

Labour's productivity in a one-product economy - marginal product falls steadily with employment

because of diminishing returns

0

20

40

60

80

100

120

1 11 21 31 41 51 61 71 81 91

Units of output per worker

Straight line represents a naïve "production function"

Millions of workers

Page 22: Long-run equity returns 1. In the long run total return on equities approximates to initial dividend yield plus growth rate of dividends and growth rate

Distribution in one-product economy 1. Chart shows total rents and wages with 30m. people employed

0

20

40

60

80

100

120

1 11 21 31 41 51 61 71 81 91

Employment in m.

Uni

ts o

f out

put Wage, with given

employmentMarginal product oflabour

Wages

Rents

Page 23: Long-run equity returns 1. In the long run total return on equities approximates to initial dividend yield plus growth rate of dividends and growth rate

Distribution in one-product economy 2. Chart shows total rents and wages

with 60m. people employed

0

20

40

60

80

100

120

1 11 21 31 41 51 61 71 81 91

Employment in m.

Un

its

of

lab

ou

r Wage, with givenemployment

Marginal product oflabour

Rent

Wages

Page 24: Long-run equity returns 1. In the long run total return on equities approximates to initial dividend yield plus growth rate of dividends and growth rate

Wages and rents as employment grows Chart shows total wage and rental income,

with given production function

0

1000

2000

3000

4000

5000

6000

1 11 21 31 41 51 61 71 81 91

Employment, in m.

Units of output

Wages

Rents

Page 25: Long-run equity returns 1. In the long run total return on equities approximates to initial dividend yield plus growth rate of dividends and growth rate

Falling populations 1.What do they mean for economies?

• Fall in total population implies:

• 1. Reduced need for residential space

• 2. Sharply reduced need for new houses

• 3. Reduced demand for food relative to other products

• Fall in working-age population implies:

• 1. Reduced demand for commercial and industrial space

• 2. Sharp demand cut for new buildings

• 3. Reduced no. of journeys to work

Page 26: Long-run equity returns 1. In the long run total return on equities approximates to initial dividend yield plus growth rate of dividends and growth rate

Falling populations 2. What do they mean for profits?

• Labour shortages, rising marginal productivity per worker and rising wages

• Rising ratio of wages to national product

• Falling ratio of rents/profits to national product

• Rents/profits rising more slowly than national product

Page 27: Long-run equity returns 1. In the long run total return on equities approximates to initial dividend yield plus growth rate of dividends and growth rate

EMPLOYMENT IN EUROPE IN THE 1990sChart shows % change in employment

-4

-3

-2

-1

0

1

2

3

4

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Germany UK France Italy

Page 28: Long-run equity returns 1. In the long run total return on equities approximates to initial dividend yield plus growth rate of dividends and growth rate

Immigration into the UK, 1991-1999

Chart shows net immigration in thousands

73

35 35

109 109 9392

178 182

0

20

40

60

80

100

120

140

160

180

200

1991 1992 1993 1994 1995 1996 1997 1998 1999

Page 29: Long-run equity returns 1. In the long run total return on equities approximates to initial dividend yield plus growth rate of dividends and growth rate

Non-British entrants to the UK,1998, excluding visitors

0 50,000 100,000 150,000 200,000 250,000 300,000 350,000 400,000

Asylum seekers

Students

Other entrants