Concept of equity markets' superior returns over long-term is the exception, not the rule: DSP report

Currently, India's Nifty 50 Index trades at 23x trailing earnings, while the Shanghai Composite trades at 11x trailing earnings.

While most equity investors believe that equity markets deliver superior returns over the long term, according to a latest DSP Mutual Fund report, this is mostly true but is applicable only in a few markets - "it is the exception and not the norm."

According to the report, if one were to assess the 16 major indices over the past 30 years, only the US market have generated returns higher than US Bonds with more than half of the markets having generated "nil to negative real returns." For example, Malaysia's real returns over the last 30 years is around -3 percent (in USD) against the US Bond Market Index's 4.5 percent. India on the other hand real return (in USD) is 4 percent.

Additionally, in local currency terms, the report notes that there is no index which has generated double-digit real returns over the last three decades. This, the report notes has forced central banks of these countries to be cautious in foreign exchange policy and setting their interest rates.

India, the report notes is one of the exceptions. For India, a mix of strong current account and FPI inflows, especially in debt markets as well as  RBI’s wait and watch approach for interest rate cuts has helped the currency and allowed monetary policy to remain stable, the report says.

India continues to outpace China

The report also notes that between 2004 and 2021, China’s economy outgrew India’s GDP, but has lost some relative momentum over the last three years as Indian economy and equity markets have outperformed China.

Currently, India's Nifty 50 Index trades at 23x trailing earnings, while the Shanghai Composite trades at 11x trailing earnings. The report notes that while there is optimism that the valuations differential can sustain and India can outgrow China over the next few years, valuations attractiveness, could be a major hurdle.

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