Stock trader and data analyst, Deepak Shenoy, has done two posts on inflation-adjusted equity returns at his popular blog, Capitalmind.in. In the first, he compared Nifty returns between December 1999 and September 2013 with the Wholesale Price Index (WPI).
The Nifty was around 1,600 in January 2000 and peaked at above 6,300 in January 2008, before falling to about 5,900 in September 2013. The nominal capital loss between 2008 and 2013 was minus five 5 per cent over 68 months. Over the entire period of 13 years and nine months, the nominal return was plus 9.9 per cent compounded.
The NSE calculates a Total Returns Index where it assumes investors re-invest dividends. The TRI gives a higher total return of 12.2 per cent compounded. Shenoy deflated the TRI, using the WPI to calculate purchasing power in constant 1999 rupees. For example, assuming inflation in 2000 ran at 5 per cent, the purchasing power of Rs 100 in 1999 would have been the same as the PP of Rs 105 in 2000.
Shenoy repeated this with the Consumer Price Index (Industrial Workers). He assumed Rs 10,000 was invested in December 1999, with dividends re-invested. The TRI was nominally Rs 45.506 in January 2008 and Rs 45,433 in July 2013 (when the last CPI-IW data is available). It deflated to Rs 31, 613 in Jan 2008, and Rs 17,997 in July 2013.
Between Jan 2008- July 2013, the loss of PP is minus 43 per cent. One telling observation Shenoy made was that, if CPI runs at 10 per cent, the Nifty must rise by 84 per cent to hit breakeven by August 2014.
These calculations highlight how difficult the past six years have been. No asset delivered positive returns all through this period of high inflation and growth stagnation. Gold had a great bull run but it is now off peak values. Real estate has seen losses in the last two years. Debt has been a consistent loser.
There was money to be made investing in any of these assets only if you picked the right asset at the right time. Most asset-allocation strategies advocate mechanical systematic allocations linked to age. That is, a 30-year will be advised to put 70 per cent of all assets in equity, 20 per cent into real estate, 10 per cent into debt, etc.
No normal systematic plan worked well between 2008 and 2013. However, the longer period of 1999-2013 saw very reasonable post-inflation returns for committed systematic investors. The compounded real return for equity over CPI-based inflation is about 4.4 per cent for this 14-year period. Debt also had long periods of positive returns and there was a real estate bull run. This partially bears out the theory of systematically investing with diversified asset-allocation.
However, six years is in itself a long period. Most people will quit believing in systematic strategies after taking losses for that long. Shenoy's numbers help explain why mutual funds have seen large net redemptions in the past two to three years.
Extended periods of negative returns are not unique to India. The US, UK, Japan, Hong Kong, Germany, etc., have all seen long periods of negative equity returns. Ditto for bonds, real estate and other assets. Another problem is that bull runs in common assets often correlate, reducing the value of diversification.
Systematic mechanical investment systems are therefore, questionable in some ways. The theory is impeccable: given enough time, equities will beat inflation and a diversified portfolio is safer than a concentrated one. But human beings have finite life spans and some will be unlucky enough to be caught in extended bear markets.
Suppose a 25-year-old implemented a systematic plan and entered equity in 2008. She would now be 31 and have only losses to show for her discipline. But she would have time to recover.
Now suppose a 55-year old, who had systematically invested in equity, was intending to gradually reduce exposure and move to other assets in 2008. She would have been forced to book losses through the next five years and at 61, she would face possible penury.
The only realistic solution for the older investor in such circumstances would be to break allocation discipline and hold the equity component while waiting for a turnaround. This distorts the age-risk profile and there are no clear answers to the question of how long should one wait in such circumstances.
The Nifty was around 1,600 in January 2000 and peaked at above 6,300 in January 2008, before falling to about 5,900 in September 2013. The nominal capital loss between 2008 and 2013 was minus five 5 per cent over 68 months. Over the entire period of 13 years and nine months, the nominal return was plus 9.9 per cent compounded.
The NSE calculates a Total Returns Index where it assumes investors re-invest dividends. The TRI gives a higher total return of 12.2 per cent compounded. Shenoy deflated the TRI, using the WPI to calculate purchasing power in constant 1999 rupees. For example, assuming inflation in 2000 ran at 5 per cent, the purchasing power of Rs 100 in 1999 would have been the same as the PP of Rs 105 in 2000.
More From This Section
In constant 1999 rupees, the TRI for Jan 2008 was 5,015, and it was 3,424 in September 2013. The post-inflation return is 5.6 per cent compounded, over 14 years. But the last six years have a negative return of minus 32 per cent, or minus 3 per cent compounded.
Shenoy repeated this with the Consumer Price Index (Industrial Workers). He assumed Rs 10,000 was invested in December 1999, with dividends re-invested. The TRI was nominally Rs 45.506 in January 2008 and Rs 45,433 in July 2013 (when the last CPI-IW data is available). It deflated to Rs 31, 613 in Jan 2008, and Rs 17,997 in July 2013.
Between Jan 2008- July 2013, the loss of PP is minus 43 per cent. One telling observation Shenoy made was that, if CPI runs at 10 per cent, the Nifty must rise by 84 per cent to hit breakeven by August 2014.
These calculations highlight how difficult the past six years have been. No asset delivered positive returns all through this period of high inflation and growth stagnation. Gold had a great bull run but it is now off peak values. Real estate has seen losses in the last two years. Debt has been a consistent loser.
There was money to be made investing in any of these assets only if you picked the right asset at the right time. Most asset-allocation strategies advocate mechanical systematic allocations linked to age. That is, a 30-year will be advised to put 70 per cent of all assets in equity, 20 per cent into real estate, 10 per cent into debt, etc.
No normal systematic plan worked well between 2008 and 2013. However, the longer period of 1999-2013 saw very reasonable post-inflation returns for committed systematic investors. The compounded real return for equity over CPI-based inflation is about 4.4 per cent for this 14-year period. Debt also had long periods of positive returns and there was a real estate bull run. This partially bears out the theory of systematically investing with diversified asset-allocation.
However, six years is in itself a long period. Most people will quit believing in systematic strategies after taking losses for that long. Shenoy's numbers help explain why mutual funds have seen large net redemptions in the past two to three years.
Extended periods of negative returns are not unique to India. The US, UK, Japan, Hong Kong, Germany, etc., have all seen long periods of negative equity returns. Ditto for bonds, real estate and other assets. Another problem is that bull runs in common assets often correlate, reducing the value of diversification.
Systematic mechanical investment systems are therefore, questionable in some ways. The theory is impeccable: given enough time, equities will beat inflation and a diversified portfolio is safer than a concentrated one. But human beings have finite life spans and some will be unlucky enough to be caught in extended bear markets.
Suppose a 25-year-old implemented a systematic plan and entered equity in 2008. She would now be 31 and have only losses to show for her discipline. But she would have time to recover.
Now suppose a 55-year old, who had systematically invested in equity, was intending to gradually reduce exposure and move to other assets in 2008. She would have been forced to book losses through the next five years and at 61, she would face possible penury.
The only realistic solution for the older investor in such circumstances would be to break allocation discipline and hold the equity component while waiting for a turnaround. This distorts the age-risk profile and there are no clear answers to the question of how long should one wait in such circumstances.