The end of the year is usually the time when investment experts begin to predict how equities will perform in the next 12 months. Looking back is also a worthwhile exercise.
The picture is not a pretty one. We are coming to the end of a lost half a decade for Indian equity investors despite decent economic growth over this period. Five years is a long stretch of time. The benchmark BSE Sensex has inched up at a compounded annual growth rate (CAGR) of just 2.57% since the first trading day of 2007. Bonds, bank deposits, gold and liquid funds have given better returns.
Another option is to look at the data over the past eight years. The Sensex has gone up at a CAGR of 13.54%, but this period is divided into two distinct phases: annual returns of 37.22% between December 2003 and December 2007, and negative returns of -6.06% in the next four years. A raging bull market followed by a flat market, with bouts of immense volatility in between to keep things exciting.
Part of the explanation is obviously that real GDP growth in the first four years of this period was faster than in the second four years: 8.8% versus 8.1%. But nominal economic growth presents the opposite picture: 14% versus 16.6%.
The different rates of economic growth in these two periods do not fully explain the huge difference in returns. This means that how the stock market performs will not be dependent on the direction of the Indian economy alone in the months ahead. Global factors will have a huge role to play.