In this edition of Oliver’s Insights, Dr Shane Oliver reports on what is, how much is required, and the prospective of equity risk premium.
The Key Points
- The equity risk premium is the excess return shares provide over a ‘risk free’ asset like government bonds.
- It is often thought that shares should return more than 5% per annum (pa) over bonds, because this is what their excess return has averaged over much of the post war period, but this likely exaggerates the required excess return for shares.
- Due to the GFC and solid bond returns as bond yields fell to record lows, share returns have struggled at times versus bonds over the last decade. But periods of underperformance are not unusual historically and do not mean the equity risk premium is defunct. In fact, thanks to ultra-low government bond yields, shares should provide a decent return excess over bonds over the decade ahead, particularly in Asia, Europe & Australia.
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About the Author
Dr Shane Oliver, Head of Investment Strategy and Economics and Chief Economist at AMP Capital is responsible for AMP Capital’s diversified investment funds. He also provides economic forecasts and analysis of key variables and issues affecting, or likely to affect, all asset markets.
Important note: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.
