Equities to outperform other Investments

 Equities to outperform other asset classes





As returns from realty and gold fall, investors are likely to benefit the most from equities.

                                      

India's structural shift from a high-inflation economy to a low-inflation economy is ex pected to have a profound impact on asset classes: those that did well in the last several years like real estate will not remain as attractive, whereas financial asset classes like equities will become the best bets.

In the last 6-7 years, the share of financial savings declined from 52% of household savings to 40%, while physical savings like gold and real estate went up. The good news is that recent policy moves in India indicate that policy-makers are cognisant and committed to bringing inflation down structurally to below 5%, which can start the process of revival in productive financial savings. As infla tion was high in the last few years, input costs like material, fuel and labour went up, which companies were unable to pass on due to weak demand. So, sales growth slowed down, margins declined by close to 400 basis points (bps), while fixed costs and interest remained high. But now that growth is reviving, sales growth across several cyclical sectors is expected to accelerate. With costs moderating, global commodity prices falling, under-utilised capacities getting utilised and pricing power increasing, profit margins are also expected to expand. Consequently, as earnings growth accelerates to 18-20% levels, equities are likely to provide superior returns in the coming years.

Going forward, with a 500 bps decline in inflation, there is likely to be a similar decline in expected returns from real estate. Moreover, home loan rates have barely declined by 50 bps so far, reducing the gap between real estate returns and interest rates. In fact, in the last one year, the All-India Residential Property Price Index has increased only 3.6%.

Then, post-Lehman, investors rushed to gold as a safe haven, leading to 36% compounded returns by 2011. But, since then, with improving financial stability, gold prices in dollar terms have fallen from $1,900-levels to around $1,100. Also, the rupee has become resilient and made gold unattractive even in rupee terms.

Indian equities are expected to be the best asset class to benefit from the positive developments happening in India. Investors should accordingly re-strategise their investment portfolios to benefit from this meaningful shift in the underlying fundamentals of each of these asset classes.

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