Equity returns outclass gold, FD, property in the long term: Morgan Stanley

Return from Indian equities (BSE Sensex) compounded on a 5, 10, 15, 20, and even 25-year period have been superior to other asset classes such as real estate, gold, 10-year treasury and bank fixed deposits (FDs), suggests a recent note by Morgan Stanley.

 

To earn this (pre-tax) return, however, investors must have an appetite for risk and should be able to digest volatility during the tenure of their investment in stocks, the note said. 

 

Equities – BSE Sensex in this case – gave a compounded annual pre-tax return (CAGR) of 15 per cent over a 25-year period, which is higher than gold (at 11.1 per cent), bank FDs (7.3 per cent) and property / real estate in seven prominent Indian cities at 7 per cent, according to Morgan Stanley.

 

Equity investors, though, had to bear a higher volatility of 30.7 per cent to earn this return as compared to 11.3 per cent for gold and 1.6 per cent for bank FDs, Morgan Stanley said. 

Equity returns

 

“If one looks at the wealth creation over the past decade, we estimate households have added $8.5 trillion in wealth, about 11 per cent has come from equities (including founders this number is around 20 per cent by our estimates). This disproportionate share of equities in wealth accretion further underscores our opinion that domestic equity investing will continue to remain strong," wrote Ridham Desai, head of India research and India equity strategist at Morgan Stanley, in a report co-authored with Sheela Rathi and Nayant Parekh.

 

Indian households, Desai wrote, are still under-invested in equities. At cost, only 3 per cent of the household balance sheet is in equities, excluding equity holdings of founders. This number, he believes, could rise to double digits in the years ahead.

 

Excluding founder wealth, equity holdings are about 8 per cent of the household balance sheet at current market value, Morgan Stanley estimates. 

 

“As such, household wealth has gained significantly from an outsized position in gold. Gold and equities have been the best performing asset classes in India over time. While property is still the largest portion of the balance sheet and has fared relatively poorly, we believe most property exposure is likely first homes and, hence, not really a discretionary asset,” the note said.

 

In the current market scenario, analysts suggest investors remain stock specific and invest only in stocks of those companies where there is earnings visibility at least for the next few quarters.

 

From a long-term perspective, Neelesh Surana, chief investment officer at Mirae Asset Investment Managers (India), believes India’s economic fundamentals remain strong, driven by structural growth factors on both the consumption and investment side.

 

“In this context there is no significant disconnect as some valuation premium could be warranted owing to longevity of India’s growth, and also considering benign cost of capital. Mismatch in the market, currently is more sector-specific rather than market-wide, making selective stock-picking essential,” Surana said.