Whereas the opening decade of this millennium was something of a nightmare for investors, with both the collapse of the dot.com bubble and the financial crisis, the past decade has handsomely rewarded investors overall. Both equities and bonds have provided strong returns, and according to Danske Bank’s chief strategist, Henrik Drusebjerg, two factors in particular have driven the financial markets over the past ten years:

“Investors and companies have ridden on a wave of declining interest rates and economic highs, and central banks are a major reason for this. They have injected huge sums of money into the global economy and sent interest rates down to levels we had never imagined at the start of the decade, and this has help to buoy up the longest upswing since World War 2,” he explains.

Returns have been high

But how good has the past decade actually been? We have looked into the figures:

EQUITIES: Global equities have generated an average annual return of 12.1%, with US equities in particular pulling higher. They have delivered an average annual return of 16.2% – driven forward by digital giants like Amazon, Facebook, Apple and Alphabet. Part of the story here is that equities got off to a flying start, as they were still in the midst of a rebound following the major price falls during the financial crisis.

BONDS: The past ten years have produced good capital gains on bonds. Overall, global government bonds have given an average annual return of 4.6%, while the equivalent figure for global corporate bonds is 6.8%.

Bonds simply cannot repeat their previous performance

When Danske Bank’s chief strategist looks towards the future, one factor in particular will be guaranteed to differentiate the coming decade from the previous: interest rates are now so low that a repeat performance of the past ten years’ fall in yields is impossible, and this is crucial for the return prospects for bonds.

“You could almost say that bonds have won something of a pyrrhic victory over the past decade, as the regular interest or coupon payments made to investors from investment grade bonds are now extremely modest, while investors at the same time can hardly expect any noticeable increase in prices – in fact, quite the reverse. This all points to very limited returns from this type of bond in the coming decade, and at worst these returns could be negative,” says Henrik Drusebjerg

Expect more modest returns from equities

According to the chief strategist, also equity investors will have to prepare for more modest returns in the coming ten years.

“We are in the late phase of an economic upswing and will probably face a recession in the coming years. That is not necessarily a disaster for equity markets, but we should expect it to result in a setback of some sort, whether smaller or larger, before equities pick themselves up and progress from there,” he says.

Henrik Drusebjerg also points out that periods of very high returns are often followed by periods of more subdued returns.

“The concept is called mean reversion, which describes how equities have a tendency to revert back to their long-term average return. You could also say equities possess a certain elasticity, and over the past decade that elastic has been well and truly stretched, with returns markedly above the historical average,” he says.

Emerging markets gaining ground

Henrik Drusebjerg sees the greatest return potential in emerging market equities in the coming ten years.

“Past decades have seen emerging markets account for an ever expanding share of the global economy, and we expect this trend will remain intact in the coming decade. However, investors should be aware that risk is also higher in emerging market equities,” he says.

Financial experiment could backfire

Henrik Drusebjerg characterises the central banks’ historically accommodative monetary policies since the financial crisis as the world’s largest financial experiment, and it could come at a cost:

“Central bank monetary policy has been a tailwind for the past decade, but there could be negative consequences in the slightly longer term. Central banks, for example, now have far fewer resources at their disposal to address future crises, and there are almost certainly other consequences we simply have not yet reckoned on. This is clearly an uncertainty factor for the next ten years,” he says.

 Average annual return2000-20102010-2020
Global equities-2.2%12.1%
US equities-3.8%16.2%
Global government bonds3.0%6.8%
Global corporate bonds 2.8%6.8%

Source: Macrobond as of 13.12.2019, based on MSCI index (equities) and ICE BofAML index (bonds). Bond index only for developed markets. Total return in EUR. Historical return is no guarantee of future return. Source: Macrobond.

Danske Bank has prepared this material for information purposes only, and it does not constitute investment advice. Always speak to an advisor if you are considering making an investment based on this material to establish whether a particular investment suits your investment profile, including your risk appetite, investment horizon and ability to absorb a loss.