Equities down, but not out

Equity investors aren’t a happy lot, given the subpar returns the asset class has given in the past one year (ending November 4).

The average return given by the debt (short-term and long-term) fund category has been higher than those delivered by the Sensex, Nifty or the equity diversified fund category in the past three, six and 12 months. Alarmingly, even in the past two years, average returns delivered by equity diversified funds and key equity indices aren’t significantly different from those of debt funds. Given that equity is a relatively riskier asset class compared to debt, it is also expected to deliver better returns than the latter.

The fact that debt instruments have beaten equities in the developed markets, like the US, in the recent past, as well as over longer time frames of say 30 years, only increases the scare if a similar situation could occur in India as well.

If the trend in Indian equity markets doesn’t improve visibly from here on, the equity category might end up delivering below-par returns in the two- to three-year periods, as well. However, experts say though Indian equities have been laggards in recent times, a trend which may continue for some time, the asset class should undoubtedly outperform debt in a longer time frame of five to 10 years.

Experts argue the time horizon to judge the performance of equities should be longer, ideally more than five years, and the recent trend of underperformance should not bother long-term investors.

Peeyoosh Chadda, head - investment advisory group, Edelweiss Mutual Fund, says, “Equity being a long-term asset class, judging it over one year will not be a correct thing. One should look at a 5- to 10-year period when you make equity investments.” Citing the example of the Bombay Stock Exchange sensitive index, he says, “The Sensex was launched in 1977 at 100. It has gone up 170 times in 34 years. That translates into a CAGR (compounded annual growth rate) of about 17 per cent (including dividends). I can assure you debt has not given that kind of returns during the same period. On a longer time frame, equities have and will tend to beat debt.”

Apart from the time horizon, experts also suggest the picture would change if a different timeframe is considered. For instance, given that Indian indices are quoting at valuations, below their long-term (10-year) average levels, the performance would appear poor.
 

EQUITY: A LONG-TERM PERFORMER
Scheme/Index	3-month	6-month	1-year	2-year	3-year	5-year	10-year
Debt Short-Term Average	8.45	9.25	8.38	6.72	7.84	7.91	6.74
Debt Long-Term Average	6.11	7.46	6.82	5.68	7.16	6.71	6.78
Crisil Composite Bond Fund Index	6.01	6.44	5.64	5.52	7.03	6.00	-
Crisil MIP Blended Index	4.74	4.21	2.29	5.78	9.23	6.72	-
Crisil Short-Term Bond Fund Index	7.73	8.23	7.09	5.95	7.38	7.15	-
Equity Diversified Average	-3.08	-3.96	-17.03	7.40	21.71	7.26	24.70
BSE Sensex	-0.74	-4.91	-15.94	5.06	18.21	5.99	19.11
BSE 100	-1.56	-4.97	-17.39	4.82	19.28	6.50	20.51
BSE 200	-2.32	-5.82	-18.83	4.63	19.88	6.32	21.27
Prices of Gold	16.44	25.61	42.28	29.60	34.18	24.96	-

S&P Nifty-0.89-4.57-15.885.9118.926.7818.13 Returns in %. For debt schemes, returns for less than 1 year are simple annualised, and greater than 1 year are compound annualised. For equity diversified schemes, returns for less than 1 year are absolute, and greater than 1 year are compound annualised. Data as on Nov 4                                                                                             Source: Icraonline.com

IDBI Federal Life Insurance CIO Aneesh Srivastava says: “It depends on what time you look at the returns. When equity markets have crashed, the picture will look distorted. So, you have to look at it when the environment is normal, say, when the index is trading at long-term average multiples. For instance, when the index is trading at 15 times one-year forward earnings, it would be a normal situation. Then, you will find equity markets giving better returns than fixed-income markets.” Current times are certainly not normal. In the US, Fed’s decision to keep interest rates low and slow economic growth have fuelled demand in bonds, pushing prices up. US investors, too, have been favouring debt to park their savings. These have helped the category outperform.

For now, though RBI seems to have thawed interest rate hikes, good news for equities, the environment for equities hasn’t changed for the better, given the domestic and global headwinds. Experts say, even as interest rates soften and with a negative co-relation between equities and interest rates, the debt category could still see the first gains.

Srivastava says: “The first leg (gains) ideally should come in the fixed-income market, while the equities market will perform with a marginal lag.” If interest rates top out, you could get 10-12 per cent return, assuming you enter the bond market at the bottom or, in other words, when yields are at the top, he adds. But, for a rally in equities, besides softening of interest rates, there are many factors that will need correction, including commodity prices and the global scenario.

“In three-six months, we should see a softening bias in interest rates, provided commodity/crude prices do not shoot up,” says Srivastava, adding the markets will start performing. He believes from current levels, returns could be good but over a three-year period.

In short, the near-term outlook for the debt category looks good. But, if you are looking at equities with a longer-term horizon, of five years or more, this may not be a bad time to put in your money in bits and pieces.