I’m referring, of course, to equities.The Nineties were a decade that focused very much on the “cult” of the equity, originally conceived by George Ross Goobey in the Fifties. It was frequently argued that equities were the only real vehicle for pension funding and for medium-term saving. This view partly stemmed from the nasty inflationary experiences of the Seventies, when equities provided a useful hedge against the ravages of inflation. It also stemmed from a view that equities provided a way for savers to get access to the New Economy.

Finally, it reflected an argument that, faced with pension shortfalls over the longer term, there simply had to be some vehicle out there that could deliver the necessary returns. Equities seemed to be a very likely candidate given their excellent performance in earlier years.The reality, of course, has been very different Equities have been falling persistently since 2000. Take, for example, total returns on the US S&P 500 index of leading shares. Returns amounted to minus 9.1 per cent in 2000, a further minus 11.9 per cent in 2001 and, in the first five months of this year, minus 23.5 per cent at an annualised rate The decline has, of course, continued in June On their own, these numbers are bad enough They’re even worse, however, set against earlier history.

If equities are down at the end of this year, this would mark the third consecutive year of losses, an undistinguished feat not seen since the onset of the Great Depression at the beginning of the Thirties.Over the past two and a half years, the losses on equities have been offset by a very good performance from bonds. Taking the US as a benchmark, bonds gave a total return of 14.5 per cent in 2000, followed by a further gain of 3.8 per cent in 2001 and, on an annualised basis, 4.6 per cent in the first five months of this year. To be fair, bond returns on this scale have not been uncommon throughout the past 20 years. The difference this time around, however, is that bond returns have remained positive when equities have fallen by the wayside.What does all this mean? When bonds and equities were giving positive returns, there were some obvious factors at play.

In particular, the move from a high inflation environment to a new, lower inflation, world meant lower short-term interest rates – good for bonds – and hopes of greater economic stability and predictability – good for equities That move, however, is now in the past. Whether you look at the US or the UK, France or Finland, Germany or Japan, inflation has structurally declined to rates that are either desirable or, specifically in Japan’s case, too low.The arrival of low inflation on at least a semi-permanent basis leaves economies exposed to new challenges. The shift from equities into bonds may be telling us something about these new challenges. Bonds offer safety, equities supposedly offer capital growth. So why is it that safety has been chosen? Why it is that capital preservation has suddenly become more relevant than capital growth? Or, why is it that people are no longer convinced that equities will be able to deliver the appropriate capital growth?These are not just trivial questions. Capital markets play a very important role in modern economies. They bring together different groups of savers with different groups of investors.