Sensex at all-time high, but real returns across asset classes just over 2%

The Bombay Stock Exchange Sensitive Index, or Sensex, might be at an all-time high of 41,000-plus points, but nominal returns from equities in the past decade, at 9 per cent compound annual growth rate (CAGR), are nothing to write home about. Returns from the mid- and small-cap indices have been lower than those of the Sensex during the period.

A Balasubramanian, CEO, Birla SunLife Mutual Fund, said: “Equity returns are broadly linked to the nominal gross domestic product and broad earnings growth of companies. These factors were high in the early 1990s and during the previous decade. They have moderated quite substantially. As a result, the returns on equity investments have also moderated.” According to him, sustained low inflation should have kept interest rates low. However, it happened with a lot of delays and not to the full extent, thereby impacting earnings potential growth substantially, and moderating the equity returns.

Returns from other savings and investment instruments too have taken a knock. For example, interest on one-year State Bank of India fixed deposit stands at 6.25 per cent. Though the rates were higher in the first five years of the decade, hitting as high as 9.3 per cent in 2011 and 9 per cent in 2013, rates declined significantly since 2015 as inflation also fell.

Mahendra Jajoo, head, fixed income, Mirae Asset Management, said: “India is integrating more with the global markets, in terms of foreign investor participation in equities and the bond market. So, interest rates are aligning themselves to global markets.” Jajoo believes that going forward, real interest rates could come under further pressure.  

Returns from gold were at par with the Sensex at 8.7 per cent CAGR, but that was only due to the rupee depreciation — the rupee has gone from Rs 46.5 a dollar in December 2009 to Rs 71.2 a dollar now. International gold returned only 3.1 per cent CAGR in the last decade.

Adjusted for inflation, the real returns look even worse. The double-digit annual rise in inflation in the first half of the decade ensured that average consumer price index-linked inflation stood at 6.20 per cent in the decade, thereby eroding real returns for investors. So, while fixed deposits barely beat inflation, equities and gold gave real returns of 2-3 per cent — quite a distance away from the days of 7-8 per cent real returns in the first decade of the century.

In contrast, the previous decade (2000-2009) saw double-digit nominal returns for stocks and gold while average inflation was at 5.55 per cent.

Thus, despite the Lehman crisis of 2008 and the subsequent slide and partial recovery in the following year, the wealth effect was evident.

Nilesh Shah, managing director, Kotak Mutual Fund cited another reason for the weak returns in the past decade: “A part of this is attributable to the current subdued phase in the economy which has led to de-rating of many large caps. Despite this, India is the second best equity market among peers.”

In fact, experts believe that interest rates would have fallen further if the rates of small savings schemes such as Public Provident Fund, Kisan Vikas Patra and others had been slashed faster. “The only reason that bank fixed deposit rates have not slipped more is because bankers fear that there will be outflows to small savings schemes,” said a debt fund manager.