Equity shares were the best performing asset class in India over the past five, 10 and 15 years, according to a report by Morgan Stanley India Research.
The one-year bank deposit and the 10-year government bond finished at the bottom in terms of returns for 10-year and five-year horizons, respectively. Surprisingly, property was the worst performing asset class for the 15-year period.
The report says equities will be the best performing asset in the coming decade, with the BSE Sensex likely to deliver annual returns of 14 per cent over the next 10 years. Indian equity returns were likely to be less volatile in the decade than in the previous 10 years, it said.
Gold has delivered positive returns for 12 consecutive years. However, the global commodities team of Morgan Stanley expects returns from gold to flatten over the next five years after the metal touches a new peak in 2010 and then gradually declines in subsequent years.
Favourable demographics and rapid urbanisation will drive demand for property, it says. Bonds and deposits are likely to continue to underperform as long-term returns implied in the current yield of 7.6 per cent make bonds unattractive even on a risk-adjusted basis, adds the report.
These conclusions are from Morgan Stanley’s research on returns and volatility of these returns across five key asset classes —one-year bank deposit, 10-year government bonds, gold, property, and equities represented by the Sensex.
The report says Indian households have missed the boat by preferring gold and fixed income assets to equities over the past decade. Households reduced their share of equity savings in financial assets from 23 per cent in 1992 to almost nil in financial year 2004, before raising it to 10.5 per cent in financial year 2008.
Assumptions on returns: For 10-year treasuries, the analysts assumed that the annual coupon was reinvested in one-year bank deposits after payment of tax at the marginal rate. The returns on bank fixed deposit are the sum total of returns from annual bank fixed deposits, together with returns from reinvestment of post-tax interest. The tax rate used is the marginal tax rate for individuals.
For equities, the BSE Sensex was taken as the proxy for returns and post-tax dividends reinvested in the Sensex. For measuring returns from property, the sample comprised residential properties in various localities across seven cities.
The gains from property, equities and gold were reduced by the long-term capital gains tax of 10 per cent at the end of the period.
