 "Equity fund heads juggled top picks in 2015")
The prospects for long-term equity investments are not looking too bright. The long-term data on the US’s S&P 500 index and BSE Sensex suggest the best seems to be behind equity investors who tend to sit on their investments for 10 years or longer.
In India, the 10-year rolling annualised returns for Sensex declined to 11.8 per cent in FY16 from a decade high of 19 per cent in FY13, and an average of 24 per cent 10-year annualised returns in the 1990s. In annualised returns, compounding is factored in.
The late 1980s and early 1990s was the best period when an investor with a 10-year horizon made 31 per cent annualised returns in 1994-95 over the previous 10 years. The recent recovery in long-term equity investments has been lukewarm and seems to be running out of steam (see chart).
The trend in the US is similar. The rolling 10-year returns for investors in S&P 500 index declined to 4.9 per cent in 2015 from an eight-year high of 5.4 per cent in 2014. In the late 1980s and all through the 1990s, long-term investors made average annualised returns of 12-15 per cent in the US.
This analysis is based on financial year-end and calendar year-end data for BSE Sensex and S&P 500 index, respectively. The comparison is based on 10-year annualised returns for both indices since data are available. While S&P 500’s calendar year-end data are available from 1954, BSE Sensex data are available from financial year 1979-80. The returns calculations do not include dividends during the holding period and the calculations are based on the rise in index value during the period.
Experts attribute decline in long-term returns to a gradual deterioration in corporate earnings growth besides changes in the respective indices’ price-earnings (P/E) ratio over the years. “The decline in returns has gone hand-in-hand with the underlying slowdown in corporate earnings in major economies across the world. In India, for example, corporate earnings growth has been five-six per cent in the post-Lehman period, putting pressure on the stock prices. You would see a similar trend in the US,” says Dhananjay Sinha, head, institutional equity, Emkay Global Financial Services.
Empirical evidence supports the thesis. In the US, where corporate earnings growth data are available for six decades, the growth in underlying earnings per share for S&P 500 companies dropped to four per cent annually for 10 years ended 2015, from a record high of 8.2 per cent annually between 1986 and 1995.
In India, decadal earnings growth declined to 9.3 per cent in FY16 from a high of 17 per cent in 10 years ended March 2012. Sensex underlying earnings and price-to-earnings ratio data are only available from 1991.
The underlying earnings per share is calculated by inverting the price to earnings multiple for the respective year for each index.
The near-term outlook is not great either, given poor corporate earnings. In India, for example, corporate profits are likely to rebound in FY16 after a decline in the last financial year, but there is a question mark over sustainability. Revenues continue to grow in single digits and corporate profit margins in FY17 could be hit by the recent rise in crude oil prices.
The situation is similar in the US and Japan. In Japan, for instance, the top companies that are part of Russell/Nomura Large Cap Index (non-financial) are likely to report earnings growth of 6.9 per cent in FY16 against a previous estimate of eight per cent, down from 10.9 per cent in FY15, according to estimates by Nomura Securities. The sample net sales growth is likely to grow by only 0.6 per cent.
| 10-Yr rolling Returns (%) | |
| Year | S&P 500 |
| 1964 | 8.9 |
| 1965 | 7.3 |
| 1966 | 5.6 |
| 1967 | 9.2 |
| 1968 | 6.5 |
| 1969 | 4.4 |
| 1970 | 4.7 |
| 1971 | 3.6 |
| 1972 | 6.5 |
| 1973 | 2.7 |
| 1974 | -2.1 |
| 1975 | -0.2 |
| 1976 | 3.0 |
| 1977 | -0.1 |
| 1978 | -0.8 |
| 1979 | 1.6 |
| 1980 | 4.0 |
| 1981 | 1.8 |
| 1982 | 1.8 |
| 1983 | 5.4 |
| 1984 | 9.3 |
| 1985 | 8.9 |
| 1986 | 8.5 |
| 1987 | 10.0 |
| 1988 | 11.2 |
| 1989 | 12.6 |
| 1990 | 9.3 |
| 1991 | 13.0 |
| 1992 | 12.0 |
| 1993 | 11.0 |
| 1994 | 10.6 |
| 1995 | 11.3 |
| 1996 | 11.8 |
| 1997 | 14.7 |
| 1998 | 16.0 |
| 1999 | 15.3 |
| 2000 | 14.9 |
| 2001 | 10.7 |
| 2002 | 7.3 |
| 2003 | 9.1 |
| 2004 | 10.2 |
| 2005 | 7.3 |
| 2006 | 6.7 |
| 2007 | 4.2 |
| 2008 | -3.0 |
| 2009 | -2.7 |
| 2010 | -0.5 |
| 2011 | 0.9 |
| 2012 | 4.9 |
| 2013 | 5.2 |
| 2014 | 5.4 |
| 2015 | 4.9 |
| Source: Bloomberg, BS Research Bureau | |
| Note: Ten year rolling returns is CAGR return during the 10-year period ending respective year | |
