Stocks likely won't beat bonds over 20 yrs-Deutsche

Tuesday January 29, 2002

NEW YORK, Jan 29 (Reuters) - Deutsche Bank said there is only a 37 percent chance that U.S. stocks will outperform bonds over the next 20 years.

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Deutsche Bank ran a series of mathematical models to reach its conclusion, discussed in a report dated Monday and titled ``The Bond Is Back: Bonds, Stocks and the Price of Risk.''

It also said other factors led it to its conclusion.

First, the 1.3 percent dividend yield of the Standard & Poor's 500 index, below the 50-year average of 3.5 percent, suggests low total returns on stocks for at least a decade.

Deutsche Bank said investors can expect stocks to return 7.3 percent a year over the next 20 years, the sum of the 1.3 percent dividend yield, a 3.4 percent real rate of annual growth in U.S. gross domestic product, and a 2.6 percent inflation rate.

Second, equities' strong performance since 1982 resulted in part from steep declines in inflation and long-term interest rates. Neither will likely fall much more, Deutsche Bank said.

And third, there was a ``confluence'' of factors, including the end of the Cold War, heavy stock investments by ``baby boomers'' born after the Second World War, and stock-market-friendly U.S. fiscal and monetary policies, that is ``unlikely to repeat itself.'' Equities returned an average 12.57 percent a year from 1981 to 2000, it said.

``These high returns reflect ... a one-off adjustment of expectations following an unusually prosperous and relatively quiet second half of a century compared to a turbulent first half where wars, financial depressions and barriers to trade all held back economic development,'' Baz wrote.

``At current prices,'' he continued, ``equities appear overvalued. For the next 10 years, we believe that equities might be increasingly perceived as a low-return high-risk investment, which should lead to a substantial reallocation of funds away from equity markets into bond markets.''

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