Equity Asset Class will continue to Outperform -Blog by Mr. Dharmesh Kant | Motilal Oswal
Equity Asset Class will continue to Outperform -Blog by Mr. Dharmesh Kant | Motilal Oswal

Equity Asset Class Will continue to Outperform

In challenged global macro-economic scenario equity as an asset class is will remain the preferred option for better absolute returns. Major indices of US equities are trading at all time highs while most of European and Emerging market equity indices are within striking distance of all time highs. Equity as an asset class has been generating superior absolute returns vis-à-vis other asset class be it bonds; restate or commodities, propelled by consistent liquidity push by central bankers across the globe. Europe and Japan two largest economies of the world have been consistently accelerating the pumping of monetary stimulus while having negative interest rate regime. Most of emerging economies are hitting lower band of interest rate cycle respectively. Monetary policy makers in USA are finding it challenging to hikes interest rates. From here on; the expectation is world economy will bottom out soon which will decelerate flow of money into long term sovereign bonds, as improving global economy will pull brakes on monetary stimulus and soft interest rate regimes. As an asset class gold and silver act more as insurance rather than a wealth generator. Money managers have already accumulated enough of Bullions as a protection against unforeseeable economic meltdown. Events like ‘Brexit’ culminated with trading rallies in Gold and Silver. Currency as an asset class has been fairly stable in recent past thanks to brilliant effort by Central Governments and Central Bankers globally. They acted pro-actively and tightened noose on speculators. Restate booms in a flourishing economy which is still a distant cry. So, the obvious option is equities. Here’s a look why: 

US equities have been the best performing equity basket. Their headline equity indices are trading at all time highs though earnings have been lackluster. S&P500 has shown some earnings stability in 2QCY16 after 6 consecutive quarters of earnings de-growth on Y-o-Y basis. So, what’s driving equity buying in USA? Its:

(i) Global liquidity thrust
(ii) Stable ROE’s (For S&P500 return on equity is 12.10% on ttm basis)
(iii) Decent dividend yields (For S&P500 it is 2.10% on ttm basis).

Ditto is the case in point for European equities, where equity dividend yields are even higher as compared to USA be it France, Germany or UK. Companies in US and Europe may not be delivering desired earnings growth but they have managed to keep ROE’s in place paying dividends to shareholders which are much superior when compared to sovereign bonds.

Given, the present context of Global Macro’s liquidity has no choice but to chase equities. Concentrated policy and monetary measures by various Governments’ and their Central bankers during last 7-8 years is likely to bear fruits in next 2-3 years. Early signs of which are visible in stabilizing corporate earnings of USA, Germany and India. Path ahead is likely of a slow but steady growth trajectory of revenue and earnings over CY17to19. Endorsement of this view also comes from meaningful recovery of commodities from multi year lows and stabilizing US Dollar. 

In emerging markets Indian equities looks most attractive. Earnings cycle is showing signs of bottoming out with 2nd consecutive quarter of overall earnings growth coming better than estimates if we exclude Public banks on Y-o-Y basis. Several policy measures have been taken and implemented be it coal block allocation, spectrum auction for telecoms, deregulation of petrol and diesel prices, gas price reform, FDI in Insurance & Defense sectors, Reduction in Repo rate, 7th Pay Commission Roll out, Passage of GST Bill etc. Monsoons have been near normal which will boost agriculture dependent rural income. Operating efficiencies, better capacity utilization and slow pick up in pricing power as demand scenario improves on higher disposable income will translate to higher ROE’s of corporate India. We expect Sensex EPS to deliver 18% CAGR over FY16-18E, which will far superior when compared to emerging market peers. 

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