INDIAN EQUITIES STILL PRICED RIGHT FOR MEDIUM-TERM INVESTORS

IN MY VIEW, 10-YEAR COMPOUNDED ANNUAL REAL RETURNS SHOULD BE ABOUT 8% WITH AN UPWARD BIAS

On December 7, 2008, I held the opinion that Indian equities were attractively priced for investors with a medium-term horizon (SENSEX PRICED TO DELIVER ATTRACTIVE MEDIUM-TERM RETURNS). I point that out not to stake my claim for predicting the breathtaking Q2 2009 rally, but to highlight that buying at the right price is key to investment success.

Short-term returns are driven by ebbs and flow in risk appetite. Such moves can be hard to predict even for the most seasoned market watchers. Over longer-term however, valuation plays the dominant role in determining returns. Sharp valuation downdrafts are good entry points for investors willing to bear near-term volatility.

EQUITIES STILL PRICED TO BEAT BONDS OVER 5 to 10-YEARS

In my previous piece, I had valued the SENSEX based on a price to nominal GDP multiple. Viewed from the same lense, equities are no longer under-valued. Yet, the asset class is not exuberantly priced either. From current levels, investors could garner at least 8% real returns over the next 10-years. This forecast assumes mean historical valuations and real GDP growth of about 7% to 8%. Needless to say that this projection builds in a margin of safety.

Yet, we must invest fully cognizant of the fact that over the short-term there could still be another downdraft.