The financial year 2009 came to a close today. The year has been one of the worst for stock markets over the past 20 years, with the Sensex having seen a fall of 38%. Over the past 20 years, only 1993 was worse than 2009, with a fall of 47%, but this was on the back of a 247% return in 1992. Though our portfolios have also seen a sharp fall in values, broadly we have done better than the overall market performance. One of the reasons for a relatively better performance was due to the fact that we did not have any investments in the sectors like Construction, Real Estate, Metals, Capital goods that saw a maximum correction. On the other hand, in hindsight, we believe we should have moved more aggressively to cash during the earlier part of 2008 – having seen markets trade at very high valuations.
Since we are at a stage where equity markets are trading at less than half their peak prices, I will try and address a few basic questions on equity investing and possible returns from equities in the coming years. I have also attached a separate, note along with this mail, that provides the underlying data for some of the conclusions in this note. Please feel free to call if you want to see more extensive data on this subject. Firstly, though markets have fallen significantly from its peak levels, Rs 1 invested in the Sensex in 1988 will be worth Rs 20.4 today as compared with Rs 5.1 for a fixed deposit, assuming a 8% post tax return, over the same period. Equities as an asset class has performed well in the past and with markets being closer to their lows than their highs, returns from equities in the coming years should be reasonably good. Given Indian growth and stability of the financial system, there is little reason to believe the future will be significantly worse than the past.
Within equities, returns from individual stocks vary dramatically. Interestingly, returns from all, so called, ‘blue-chip’ stocks vary dramatically. Rs 1 invested in a Tata Motors in 1998 is worth Rs 8 today, whereas the same investment in Hindustan Unilever is Rs 48. Companies like Infosys have shown much better returns with Rs 1 invested in 1993 being worth Rs 870 today. On the other hand, stocks like Indo Rama Synthetic has seen a negative stock price performance since 1992 despite its revenues having grown 37 times since 1992.
Equities as an asset class has been a reliable investment avenue in the past. Buying equities at closer to the lows is a sensible strategy for the long run. Even within equities, companies that shows stable growth, generate consistent free cash and have low debts tend to perform in a more stable manner than others. At current levels, there is very little reason to be worried about investing in equities and in fact, looking at the prices of some of the stocks, one should be excited with the possibilities from investing in equities. Markets may continue to remain weak for the next few month, but this is an opportunity to buy into some high quality businesses as sensible prices.