Premise of long-term returns of Indian equities challenged

While Indian markets have retained a large part of the gains made in the April 2003 to January 2008 rally, long-term returns have started faltering

 

The premise that in the long-term equities will generate the highest risk-weighted returns is getting challenged with each passing day.

In the US, the S&P 500 total returns index has underperformed long-term treasury bonds for five-year, 10-year and 25-year periods. This is based on Ibbotson data quoted by Peter Bernstein in a recent Financial Times article.

While Indian markets have retained a large part of the gains made in the April 2003 to January 2008 rally, long-term returns have started faltering. In January 2008, the Sensex index on the Bombay Stock Exchange had delivered an average annual return of 22% based on total returns (capital appreciation plus dividend) for a 10-year period. Its average annual 10-year returns have now halved to 11%. Note that early 2008 as well early 2009 didn't represent an unusually high-low base.

 

Data for the total returns index is available only since 1996 on Bloomberg, but excluding dividend income, the Sensex has delivered average annual returns of just 5.5% in last 15 years. Dividend income in India is typically 2.5% of the investment value annually, which means total returns in the past 15 years stand at only 8%.

Returns over a 25-year period are still impressive at 15% (excluding dividend), but note here that the base year (1984) is from the pre-liberalization period and a time when foreign institutional investors weren't allowed in India, representing an unusually low base.

Another premise that's being challenged is one can't go wrong with investments in blue-chip Indian companies. Till recently, Hindustan Unilever Ltd was a rare example of a large firm generating zero or negative returns for shareholders over a long period. But the recent crash has added to this list names such as Hindalco Ltd, Tata Steel Ltd and Tata Motors Ltd. The levels these stocks now trade at were first seen in 1991-1992.

In other words, excluding the dividend income received by investors (which is lower than the return on savings bank deposits), investors have earned zero return on these stocks in the past 17 years. Companies such as Infosys Technologies Ltd, Wipro Ltd and Mahindra and Mahindra Ltd haven't generated any return in the past 9-10 years, except the minimal dividend income paid out. Two other firms that are part of the Sensex, ICICI Bank Ltd and Reliance Infrastructure Ltd, have generated zero return in the past five years.

These calculations are based on current prices and pertains to investors who adopt a long-term buy and hold strategy. Of course, those who book profits regularly would be much better off.

Based on the low Sensex returns in the long-term and the dismal performance of many of its constituent companies, investors need to realize that sticking to blue-chip names and indices may not be the right strategy for participating in the markets. Of course, there are higher returns available, but is it worth the risk?