Spotlight: inflation, interest rate rises & diversification

Twenty-third edition of authoritative guide focuses on key long-run returns

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The winds of change are blowing in financial markets, and with inflation raging like a tempest, bonds and equities are hurting. Currently, it is vitally important to review portfolio diversification across asset classes, helping to reduce risk. In such an environment globalisation makes it easier to invest internationally, helping to reduce portfolio risk and raise Sharpe ratios.

These are just some of the key findings from the Credit Suisse Global Investment Returns Yearbook 2022. Now in its 23rd year, the Yearbook is the authoritative guide to historical long-run returns. Published by the Credit Suisse Research Institute in collaboration with London Business School, it now covers all the main asset categories in 35 countries (including three new markets this year). Most of these markets, as well as the 90-country world index, hold 122 years of data, dating back to the year 1900.

This year, the Yearbook’s authors, renowned financial historians Professor Elroy Dimson, Professor Paul Marsh and Dr Mike Staunton, examine the power of diversification across stocks, countries and asset classes and look at the all-important stock-bond correlation.

Highlights from the Yearbook include:

Long-term perspectives:

  • Equities have performed best over the long-run. Over the last 122 years, global equities have provided an annualized real USD return of 5.3% versus 2.0% for bonds and 0.7% for bills.
  • Equities have outperformed bonds, bills and inflation in all 35 markets. Since 1900, world equities outperformed bills by 4.6% per year and bonds by 3.2% per year.
  • Prospectively, the authors estimate that the equity risk premium will be around 3½%, a little below the historical figure of 4.6%.
  • With a 3½% premium, equity investors would still expect to double their money relative to short-term government bills in 20 years.
  • Since 1900, the USA has been the best performing stock market with an annualized real return of 6.7%. Its share of global equities has quadrupled to an astonishing 60%.
  • Historically, diversification across stocks, countries and assets has greatly improved the return-risk tradeoff. Prospectively, the benefits remain large.

Shorter-term concerns: Inflation and interest rate hiking cycles:

  • In 2020, the average inflation rate across the 21 Yearbook countries with financial histories since 1900 was just 0.4%, the lowest since 1934. In 2021, average inflation rose to 4.4%.
  • Inflation is a major concern: US inflation exceeds 7%; UK and German inflation is 5%.
  • The Yearbook confirms that bonds suffer during inflation, but high inflation also hurts equities.
  • Equities do not hedge inflation: real equity returns are negatively correlated with inflation.
  • Despite this, and reflecting the equity risk premium, stocks have been inflation beaters.
  • The current worry is not just inflation; it is tightening monetary policy and interest rate hikes.
  • Over the last century, US and UK asset returns have been depressed during rate-rise periods.
  • US stocks had annualized real returns of 3% during rate-rise periods vs 9.7% during falls.
  • US bonds had annualized real returns of 0.2% during rate-rise periods vs 3.7% during falls.
  • The UK mimicked the US experience of interest rate hiking cycles.
  • During hiking cycles, it has been hard to identify assets that have performed well.
  • Industry returns, factor premiums and real-asset returns have been lower when rates rise.


  • Diversification reduces risk so investors can earn the same return at lower risk, or a higher return for the same risk. The authors refute claims that 10–20 securities can ensure high diversification.
  • The current environment of higher volatility and sector/factor rotation is potentially more promising for active investors. But to generate alpha requires genuine skill and higher risk exposure.
  • Globalization has made it easier to invest internationally. Over the last 50 years, global investment generated higher reward-to-risk ratios than domestic investment in most countries.
  • There were a few exceptions. In the USA, over the last 50 years investors would have been better off investing domestically. This reflected excellent returns and lower US stock market volatility.
  • Prospectively, the authors advise all investors, including from the USA, to invest globally. This will reduce portfolio risk and raise Sharpe ratios. But the authors caution that there are no guarantees.
  • Investors from smaller and emerging markets have more to gain from global diversification than those from developed markets. But developed market investors should still buy emerging markets.
  • Diversification across asset classes can also reduce risk. The negative stock-bond correlation since the late 1990s made stocks and bonds a natural hedge for each other. However, the authors do not recommend relying on a continuation of negative stock-bond correlations.
  • The authors also show that correlations tend to increase in bear markets and times of crisis. But they conclude that, for long term investors, these short-term factors should not be a big concern.

Speaking about the 2022 Yearbook, Elroy Dimson, who chairs the Centre for Endowment Asset Management at Cambridge Judge Business School, and is Emeritus Professor of Finance at London Business School, Paul Marsh, Emeritus Professor of Finance at London Business School and Dr Mike Staunton, the Director of the London Share Price Database, a research resource of London Business School, said, “The Yearbook provides us with a unique and detailed long term perspective on asset class performance stretching as far back as 1900. However, its purpose is not simply to record financial history but to learn from it and shed light on issues facing investors today. As we navigate through increasing inflation, and an impending reassessment of global monetary and fiscal policy, our research provides the evidence to underpin investment strategy for the future.”

A summary copy of the book is available for free download here.