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There could be more to come, as the economic outlook is certainly not conducive to a near-term recovery in equity markets.

The worrying thing about recent stock market performance is that the attractiveness of equities as an asset class is being tarnished. Equities are supposed to deliver solid returns over the medium term and, most studies have found, they have provided superior performance to bonds and other major asset classes if held for long enough. But when we look back over the last decade it is a pretty dismal picture. The real compound return from the UK equity market (compared to the RPI) has been just over 1 per cent per year. This marks the worst performance in real terms since the decade ending in the mid-1980s.

The performance is now worse than for government gilt-edged securities. Compound 10-year returns from both asset classes have been quite similar since the early part of this decade but the recent leg-down in the equity markets have made stocks the worse-performing asset of the two.

Will this situation persist? For some time there have been warnings about a low return environment as asset prices and corporate earnings revert to longer-run trends after the bull market of the 1990s. The fact that real returns have been lower than real economic growth over the last decade is part of the same story – it was always unsustainable that real returns could be so far above real economic growth, as they were in the 1980s and 1990s.

Part of that was the unexpected decline in inflation in the 1980s. Given high starting nominal yields the decline in inflation beyond what was forecast gave a huge boost to real returns on financial assets. We are in danger of experiencing the reverse. Nominal yields are low and inflation is rising. Either inflation has to fall back to very low levels or there needs to be a rise in yields before higher real returns can be restored.

Indexing doesn’t look attractive in this environment. Some investors may prefer active strategies that aim to generate alpha through market timing. However, it would seem more prudent to focus on where you can find solid income and inflation protection. The equities of mature, solid, dividend paying companies are attractive (particularly at current price/earnings levels), as are short-duration investment-grade corporate bonds and inflation-linked securities to provide the protection against any unexpected rise in inflation in the coming decade.

Chris Iggo is a senior strategist, UK, at First State Investments