Return on Investment:1998-2008

Despite the slump of over 35 per cent this year, equities as represented by the BSE Sensex have remained the best-performing asset class with an annual compounded post-tax return of 14.3 per cent over a 10-year period from 1998 to July 14, 2008, beating real estate, gold and all other major asset classes.This is in contrast with the returns provided by equities in 1994-2004 period, when the BSE Sensex delivered an annual return of just 5.4 per cent, less than the inflation, as per a study by Morgan Stanley.Equities, which are also the riskiest of all asset classes, were followed by property with a 13.1 per cent compounded annual growth rate (CAGR) and gold with 11.2 per cent. For measuring return on property, Morgan Stanley’s sample consists of residential properties in various localities across eight cities – Mumbai, Bangalore, Delhi, Kolkota, Nasik, Ahmedabad, Pune and Chennai. The 10-year treasury bond gave a return of 9 per cent during the period. The one-year bank deposit finishes at the bottom of the pile with an annual return of 4.9 per cent suffering from both short duration and high tax rate. The riskiest asset has generated the highest return – an indicator of rationality in the asset markets, the report said.The 10-year period spans from January 1, 1998 to July 14, 2008, thus factoring in the fall witnessed in the market this year. Morgan Stanley analysts said an equally weighted portfolio of all these five diversified assets generated an annual return of 10.5 per cent against the consumer price inflation and nominal GDP growth over the period of just under 5 per cent and 12 per cent respectively. The realised equity risk premium using the 10-year treasury bond as the risk-free asset was 5.3 per cent.
The Sensex seems poised to deliver a 15 per cent compounded annual return over the next 10 years (which also implies a Sensex of over 50,000 in year 10). In the short term, however, things are not bright.The 6 to 12month outlook remains negative as the market faces headwinds from high crude prices, political uncertainty, fragile global financial markets, weak domestic sentiment, rising bond yields, slowing growth, and prospects of earnings downgrades.

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