IRISH LIFE INVESTMENTS December 2019 History of Equity Markets 1 - PowerPoint PPT Presentation

BROKERS IRELAND IRISH LIFE INVESTMENTS December 2019

History of Equity Markets 1 2 Diversification 3 Active vs Passive Behavioural Finance 4 5 Irish Life Fund Solutions 6 Investment Quiz 7 Market Outlook 8 Summary

HISTORY OF EQUITY MARKETS

LONG TERM EQUITY RETURNS – US EQUITIES 1927-2018 S&P 500 Global financial crisis 10000 Tech bubble Savings & loans crisis 1986-95 Vietnam war 1969-72 1000 Q4 2018 crash Stagflation 1973-75 US QE1 Allied invasion of Iraq Post War Boom Tech bubble burst 100 Iraq invasion of Kuwait New Deal 1933-40 Black Monday Oct 1987 Reagan era Oil shocks 1973 & 79 10 Korean War 1950-53 WW2 1939-45 Great Depression 1 30/12/1927 30/12/1929 30/12/1931 30/12/1933 30/12/1935 30/12/1937 30/12/1939 30/12/1941 30/12/1943 30/12/1945 30/12/1947 30/12/1949 30/12/1951 30/12/1953 30/12/1955 30/12/1957 30/12/1959 30/12/1961 30/12/1963 30/12/1965 30/12/1967 30/12/1969 30/12/1971 30/12/1973 30/12/1975 30/12/1977 30/12/1979 30/12/1981 30/12/1983 30/12/1985 30/12/1987 30/12/1989 30/12/1991 30/12/1993 30/12/1995 30/12/1997 30/12/1999 30/12/2001 30/12/2003 30/12/2005 30/12/2007 30/12/2009 30/12/2011 30/12/2013 30/12/2015 30/12/2017 4

LONG TERM EQUITY RETURNS – US EQUITIES 1900-2018 7 6.4 6 5.3 5 3.7 4 3 1.9 2 0.8 0.7 1 0 1969-2018 1900-2018 Equities Bonds Bills Note: The three asset classes are equities, long-term government bonds, and Treasury bills. All returns include reinvested income, are adjusted for inflation, and are expressed as geometric mean returns. ▪ LT Annualised Return is 9.4% Nominal and 6.4% Real return ▪ Inflation 2.9% p.a. 5

RELATIVE SIZES OF WORLD STOCK MARKET The evolution of equity markets over time from end-1899 to end-2017 Top 3 1899 UK 25% USA 15% Germany 13% Top 3 2018 USA 53% Japan 8.4% UK 6% 6

HOLDING PERIOD MATTERS The longer your holding period, the better chance of positive returns Maximum and minimum real returns over different periods Note: light blue represents current year. Source CRSP. Barclays Research 7

DISTRIBUTION OF EQUITY RETURNS ▪ Distribution of Equity Returns S&P 500 ▪ 3 years below 30% drop 8

POWER OF COMPOUNDING – £100 INVESTED IN 1899 Without reinvesting Income reinvested $ Equities 15,185 2,706,467 Gilts 63 41,873 Cash 20,733 9

LESSONS FROM HISTORY 10

DIVERSIFICATION, WHAT DRIVES MARKETS & AVOID THE HEADLINES

WHAT CAN YOU INVEST IN? – MAJOR ASSET CLASSES Cash Bonds Stocks Commodities Property Alternatives 12

WHY DIVERSIFY? 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 YTD Indexed Fidelity India Indexed Indexed Fidelity Euro Indexed Fidelity India Fidelity EMEA Indexed Ireland Fidelity India Indexed Ireland Emerging Market Fidelity China Irish Property 1 China European Gilts Technology Opps Technology 87.18% 41.64% 37.26% 56.84% 33.27% Equity 25.87% 6.16% 45.60% 10.48% 5.14% 27.07% 22.93% 20.59% Indexed Pacific Indexed Fixed Indexed North Fidelity Spec Indexed Fidelity India Indexed Indexed North Property Fidelity Managed Fidelity EMEA Fidelity India Fidelity India 2 Equity Interest American Equity Sitns Technology China Technology American Equity Portfolio Intl 79.31% 39.17% 24.44% 18.77% 9.54% 4.77% 25.86% 30.34% 42.35% 22.19% 19.45% 5.84% 22.71% Fidelity Man Fidelity India Fidelity Man Indexed Fidelity Spec Fidel Glob Prop Indexed Indexed Pacific Fidelity India Fidelity Multi Fidelity Global Cash Fidelity India 3 Inter China Inter European Gilts Sitns Shares Japanese Equity Equity China Asset Str Def Prop Shares 4.03% 25.19% 11.31% 78.98% 32.25% 4.08% 28.62% 36.49% 21.55% 18.82% 24.41% 5.44% 19.90% Indexed Indexed Fidelity Euro Inflation Link Indexed Indexed Fixed Fidel Glob Prop Indexed Indexed Fidelity Euro IL/Setanta Global Infrastructure Emerging Market Emerging Market UK Property 4 Opps Bond Technology Interest Shares Japanese Equity Technology Opps Equity Equities Equity Equity 5.29% 9.40% 2.97% 32.05% 3.61% 24.61% 24.42% 35.57% 20.60% 16.02% 18.03% 73.05% 19.45% Indexed Indexed Indexed Pacific Indexed Pacific Indexed UK Indexed North Fidelity Spec Indexed Indexed Indexed North Fidelity EMEA Fidelity China Fidelity EMEA 5 Technology Japanese Equity Equity Equity Equity American Equity Sitns Technology Technology American Equity 23.14% 28.98% 15.50% 7.46% -25.03% 67.43% 29.10% 2.55% 22.26% 18.58% 16.72% 4.58% 17.37% Property Property Fidel Glob Prop Indexed Euro Property Infrastructure Property Infrastructure Multi Asset Indexed Indexed Fidelity China Indexed Ireland 6 Portfolio Portfolio Shares Short Dated Bond Portfolio Equities Portfolio Equities Portfolio 6 European Gilts European Gilts 64.48% 23.08% 6.24% -27.62% 28.64% 2.42% 21.62% 28.55% 17.18% 15.00% 14.71% 1.63% 15.40% Indexed Indexed Indexed Indexed Pacific Indexed North Fidelity Man IL/Setanta Indexed Pacific Indexed Fixed Indexed Ethical UK Property Emerging Market UK Property Consensus Equity 7 European Equity Technology Equity American Equity Inter Managed Equity Interest Global Equity -31.70% Equity 2.35% 20.38% 6.08% 50.89% 20.56% 28.51% 15.05% 12.33% 13.28% 1.06% 14.73% 28.08% Indexed North Fidelity Euro Fidelity India Indexed Euro Indexed Fidelity Man Property Indexed World Fidelity Global Cash UK Property Fidelity EMEA Cash 8 American Equity Opps China Corporate Bond European Equity Inter Portfolio Equity Fd Spec Sitns 4.02% 14.29% 13.12% 1.01% -34.11% 45.14% 27.78% 2.24% 20.15% 19.52% 21.68% 11.69% 14.22% Fidelity Spec Fidelity Spec Indexed Fidelity India Indexed World IL/Setanta IL/Setanta Equity Fidelity Spec Fidelity Euro Consensus Indexed Ireland Fidelity China Fidelity India 9 Sitns Sitns Commodities Chin Equity Fd Managed Dividend Sitns Opps -34.72% 2.17% 11.86% 0.54% 1.17% 43.14% 25.54% 19.97% 19.06% 20.44% 11.66% 12.53% 13.85% Indexed Fixed Fidelity Man Fidelity Spec Infrastructure Fidelity Man Fidelity Euro Indexed IL/Setanta Equity Multi Asset Fidelity Man Indexed EU Short Active Managed Consensus Equity 10 Interest Inter Sitns Equities Inter Opps European Gilts Dividend Portfolio 6 Inter Dated Bond -37.46% 4.46% 0.41% 40.68% 24.40% 1.25% 18.16% 18.57% 20.43% 11.73% 11.23% 11.99% 0.08% 13

EARNINGS DRIVE MARKETS MARKET CONTROVERSIES ARE A CONSTANT --- S&P500 (LHS) --- Earnings Per Share -RHS 14

BEWARE HEADLINES – THE DEATH OF EQUITIES February 2000 August 13, 1979 The Boom – How Prosperity is The Death of Equities reshaping the American Economy 15

SOCIAL MEDIA CAN MOVE MARKETS 16

KEY LEARNINGS I Diversification is important – Earnings are the driver of Tune out the Noise! assets have shares prices in the long run different characteristics 17

ARE MARKETS EFFICIENT? ACTIVE V PASSIVE

ARE MARKETS EFFICIENT? ▪ Efficient Markets Hypothesis (EMH) ▪ Yes and No ▪ Efficient Markets mean all information about a stock is in the price already and assets are fairly priced ▪ Is there any point to doing Fundamental Analysis? ▪ Probably are efficient in the long term but not so in the short term – this is where dislocations and bubbles occur 19

ACTIVE OR PASSIVE? PASSIVE ▪ Passive Approach is buy all of the stocks in an index and not conduct fundamental analysis ▪ Tracking error is a key skill here ▪ Replicate the benchmark and get the benchmark return ▪ Majority of active managers underperform the major indices 20

ACTIVE OR PASSIVE? ACTIVE ▪ But some managers do outperform markets ▪ Any manager can outperform over 1 year but can they do it consistently? ▪ Today there is no information advantage but you can have a knowledge advantage – most investors don’t think long term 21

BEHAVIOURAL FINANCE

BEHAVIOUR – WHAT INFLUENCES OUR DECISIONS? INVESTOR BEHAVIOUR Loss Aversion Herding Investors are more averse to losses Copying the behaviour of others even than to potential returns in the face of unfavourable outcomes Narrow Framing Regret Making decisions without considering Treating errors of commission more all implications seriously than errors of omission Mental Accounting Media Response Taking undue risk in one area and Tendency to react to news without avoiding rational risk in another reasonable examination Diversification Anchoring Confirmation Bias Seeking to reduce risk, but simply Relating to the familiar experiences, even Accepting information that confirms using different sources when inappropriate already-held views 23

VOLATILITY HAS A DIRTY NAME Seeing through the noise: ▪ Markets suffered double-digit declines in 22 of the last 39 years, yet still ended those years with positive returns 75% of the time. S&P 500 intra-year declines vs. calendar year returns Despite average intra-year drops of 13.9%, annual returns positive in 29 of 39 years Source: Factset, Standard & Poor’s, J.P. Morgan Asset Management 24

TIMING THE MARKET CAN BE COSTLY Annual Price Returns S&P 500 1996-2016 10.00 7.68 8.00 6.00 Percentage 4 4.00 1.57 2.00 0.00 -0.51 -2.00 -2.42 -4.00 CAGR Excluding 10 best days Excuding 20 best days Excluding 30 best days Excluding 40 best days 25