Bridge over ocean
1 July 1982 Financial Analysts Journal Volume 38, Issue 4

International Equity and Bond Returns

  1. Roger G. Ibbotson
  2. Richard C. Carr
  3. Anthony W. Robinson

An examination of the returns on equities, domestic bonds and crossborder bonds of the U.S. and 17 foreign countries over the 21-year period 1960-80 indicates that foreign stocks and bonds generally outperformed U.S. securities, although the U.S. was the outstanding performer in some periods. On a beta-adjusted basis, U.S. equities underperformed the market-value-weighted world equity market portfolio by –0.69 per cent per year, with a beta on the world market of 1.08. While bonds yields were high in the United States, non-U.S. bonds benefited from appreciation against the dollar in the 1970s, making them superior investments from a U.S. dollar investor’s perspective.

International investors may expect gains from diversification. In addition, any imperfections in international capital markets may allow them additional profit opportunities. The data presented here suggest that the economic relationships often posited between international stock and bond expected returns, inflation and exchange rates hold only imperfectly. Deviations from the international parity theorems occur often, especially over short periods of time.

The relationships exhibited between stock, bond and inflation returns within each country and in the world framework are instructive for the one-country investor, as well as the international investor. They indicate that risk is generally rewarded (with stocks outperforming bonds in most countries), and that inflation hurts both the stock and long-term bond markets in most countries, while a country’s short-term securities tend to track its inflation rate.

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