What Drives Long-Term Equity Returns

Jan 12, 2010

We analyze components of long run returns of international equity markets using historical data spanning the 1975-2009 period. The analysis shows that after inflation, dividend income was the most important part of equity returns for the majority of markets. Growth in real book value had a low, but steady contribution to performance. Changes in valuation tended to smooth out in the long run, but had important implications to equity investing in the short run. We also show how expectations of future excess returns – as derived from the price to book ratio –  have evolved over time and converged among different regions.