View more on these topics

Bonds vs equities: A 30-year picture

Juan Nevado

Asking simple questions often provides a useful means of highlighting how perceptions can differ from reality when talking about financial markets.

For example, over the past 30 years, would it have been better to be an equity investor or a bond investor? Considering the massive tailwinds bonds have experienced, it probably would not surprise many people that bond investors in most developed markets have just experienced a 30-year bull market. 

However, it is interesting to note that in many regions, since the late 1980s, equities have delivered real returns in line with – or even higher than – bonds.

It is interesting because the only benefit of holding bonds over equity over the period as a whole has been much lower volatility.

It is also notable that since 2008, cash, the ultimate perceived haven, has lost value while both bond and equity investors have made money. 

Given the macro environment, especially in recent years, investors could have expected bonds to deliver much more than equities. The shock of the 2008 financial crisis ignited a prolonged period of broad-based risk aversion which we are yet to see investors fully shake off, creating significant headwinds for equities.

This has been coupled with central banks engineering a bond rally by stimulating massive demand through extraordinary levels of quantitative easing.

Nonetheless, most investors would probably still feel much lower volatility for comparable returns is the obvious choice. However, we need to look more closely at what has driven these price movements in bonds and equities to see how sustainable this pattern is.

Bond markets are approaching an important inflection point and fixed income investors should be a little more cautious and prepared for the possibility of lower returns and higher risk in the period ahead. 

Short-term volatility

Meanwhile, equities broadly still look priced for relatively attractive potential returns for medium-term investors who are willing to tolerate short-term volatility.

Market-implied returns in the UK and Germany in the late 1980s were high in real terms for equity, bonds and cash (see chart above). The difference between implied and delivered real returns in bonds and equities reflects very different drivers, and thus may be misleading.

Bond investors have fared well because of consistent rerating, rather than improvement in underlying value.

In 1987, high interest rates were used to tackle inflation, providing a solid base for savers and keeping bond yields high. As inflation has fallen across developed markets, policy makers have shifted their focus from inflation-fighting towards growth-stimulation.

Interest rates have been cut to historic lows and there has been a slide downwards in mainstream bond yields, towards current real levels approaching zero. 

Underlying value

As we have seen, over the past 30 years, real returns on equities have at least kept pace with bonds. However, in the case of equities, returns have been driven by improvement in underlying value through growth of earnings, dividends and corporate value.


Over the period, the UK equity index has risen broadly in-line with earnings per share, keeping price to earnings ratios unchanged. Yet equities remain cheaper than bonds. There is likely a behavioural element to the above-average valuation gap between equities and bonds.

Investors often confuse volatility with risk, when in fact true risk would be the potential for permanent loss, and in particular remain emotionally scarred by their experience of the 2008 financial crisis.

It is impossible to forecast accurately the path of asset prices over the next 30 years, or any meaningful time period. Furthermore, such speculation may prove a dangerous distraction from what really matters – the observable facts in front of us today.

Many areas of the global bond market have been artificially inflated to unattractive levels of valuation and unsustainably low yields.

Ultimately, bond yields can only decline so far and the returns on bonds over the coming years are unlikely to match those seen during the 30-year bond bull market since the end of the 1980s.

Meanwhile, equities remain behaviourally-undervalued. Although equity markets movements over the past 12 or 18 months suggest investors have begun to be less concerned about tail risk, bouts of significant short-term volatility indicate sentiment remains fragile.

The result is equity valuations in selected geographies and sectors remain reasonable, and especially compelling versus bonds, against a broad global backdrop of low inflation, economic recovery and still-accommodative policy.

Juan Nevado is a fund manager from the M&G multi asset team


Adamson-Clive-FCA-2013 700 x 450.jpg

FCA changes policy on compliance guarantees

The FCA is revising its guidance on attestations and plans to publish quarterly data on their use following repeated concerns over transparency and proportionality. An attestation is a written confirmation that a firm is meeting certain regulatory requirements. They can take the form of a Dear CEO letter and are usually required by the chief […]


Tyrie questions FCA over cost of skilled person reports

Treasury select committee chair Andrew Tyrie has written to the FCA raising concerns over the cost of skilled person reports. Skilled person reports, also known as section 166 reports, check for weaknesses or failings in a firm’s practices and cover areas such as compliance, fraud, products and capital adequacy. The regulator orders these reports to be […]


Ex-Ashcourt Rowan boss sets simplified advice charges at 0.75%

Online simplified advice firm Wealth Horizon has set out its charging structure which includes a 0.25 per cent initial advice charge. The firm, run by former Ashcourt Rowan Financial Planning chief executive Chris Williams will also charge a further 0.5 per cent ongoing charge for portfolio rebalancing. The proposition is powered by Parmenion, which charges […]


Barnett Waddingham acquires Sipp provider

Barnett Waddingham has acquired Wirral-based Sipp and SSAS provider Harsant Pensions for an undisclosed sum. The deal means Barnett Waddingham takes on 400 Sipp clients, taking its portfolio to over 2,725 schemes and more than £1bn in assets under administration . Its SSAS book is to grow by 70, to more than 2,100 schemes and […]

Johnson Fleming is a finalist at UK Pensions Awards 2016

The UK Pensions Awards shine the light on excellence and recognise the advisers, providers and investment managers that offer the highest level of innovation, performance and service to occupational pension schemes and their members. This year’s awards looked at advisers and providers across 31 different categories and were rigorously judged by a panel of senior […]


News and expert analysis straight to your inbox

Sign up


There are 2 comments at the moment, we would love to hear your opinion too.

  1. “It is impossible to forecast accurately the path of asset prices over the next 30 years, or any meaningful time period. ”

    Precisely so. And this rather weakens the significance of this kind of article (c/f the hardy annual, “this could be Japan’s year”).

    Some 18 -24 months ago the airwaves were full of warnings that the corporate bond bubble was about to burst; several advisers quoted on forums that they were taking their clients out of bonds and into cash. Those who did this cost their clients anything up to 20% growth in the interim.

    All of which would seem to me to be a vindication of sticking to tried and tested investment principles and just watching the bandwagons roll by.

  2. “Investors often confuse volatility with risk, when in fact true risk would be the potential for permanent loss”

    Too many advisers and certainly the FCA make this same mistake. Over 30 years Cash is just about the riskiest “investment” that anyone could make – almost guaranteed to lose in real terms and yet 80% of liquid wealth is held in cash !!!!! Buy equities, buy bonds, buy both but forget cash as anything other than rainy day money.

Leave a comment


Why register with Money Marketing ?

Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

News & analysis delivered directly to your inbox
Register today to receive our range of news alerts including daily and weekly briefings

Money Marketing Events
Be the first to hear about our industry leading conferences, awards, roundtables and more.

Research and insight
Take part in and see the results of Money Marketing's flagship investigations into industry trends.

Have your say
Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

Register now

Having problems?

Contact us on +44 (0)20 7292 3712

Lines are open Monday to Friday 9:00am -5.00pm