As an investor, one of the columns worth looking out for is that of Akash Prakash’s in the Business Standard. Akash founded and runs Amansa Capital, a successful investment management firm out of Singapore. He highlights a report from Deutsche Bank and brings out some interesting insights about long term returns in equities:
Why starting valuations are important even from a long-term perspective:
“In the last 25 years, US equities (S&P 500) have delivered a real equity return of 4.9 per cent per annum, which is the second-worst 25-year return among the nine 25-year blocks going back to 1800. Over the last 100 years, US equities have delivered real annualised returns of 7.3 per cent, making the 4.9 per cent significantly below the long-term trend.
How can this be true, given the new highs at which the markets are trading? What about the Magnificent 7 and their dominance of returns? Are we not near all-time high valuations, in the top 1 per cent of market history?
The truth behind this poor relative performance of US equities lies in the starting point valuations. The start of the year 2000 marked the peak of the internet bubble, with the S&P 500 reaching its highest cyclically-adjusted price-to-earnings (P/E) ratio in history. Despite valuations returning to near-peak levels today (at the end of the 25-year period) and being in the midst of a bull market, the starting valuations were so high that they created a significant drag on returns. If we look at the entire 25-year period, it took until 2013 for equity real returns to cross the real returns of US Treasury bills (cash proxy).”
How there is little correlation between GDP growth and stock market returns:
“China grew real gross domestic product (GDP) at over 8.5 per cent per annum through the 25 years. The Chinese economy in USD terms was only 12 per cent of the US economy at the beginning of 2000, today it is 70 per cent. China went from being 3 per cent of world GDP in USD terms (year 2000) to 17 per cent today. It became the manufacturing base of the world and moved hundreds of millions of people out of poverty. Despite all this progress and its role as the global growth champion, China delivered a real equity return of only 4 per cent per annum over the past 25 years—lower than the US and much lower than India.”
How remarkably solid and consistent Indian markets have delivered:
“Over the last quarter century (2000-2024), India delivered the best real equity returns of any major equity market, with a real return of 6.9 per cent per annum, outperforming the US. Even looking at 50 years of data (1975-2024), India at 9.7 per cent real equity returns outperforms all other EM countries and even the US. Only Sweden at 9.9 per cent real returns outperforms India. We have clearly established the ability to deliver strong equity market returns — and over an extended period. This is a fact that most global investors do not yet fully appreciate.”
Yet the future is uncertain:
“The next 25 years will be challenging for the world and equity markets. The US and India face the challenge of high starting-point valuations, while Europe grapples with poor demographics and slowing productivity. China was unable to deliver returns when its economy was on fire, and today it faces geopolitical challenges.”
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