Will achha decade finally come after the lost decade?

This century had one decade of good earnings followed by one lost decade. The odds are high that normalcy will come back in FY22 and EPS growth can go back to 10% range. If God is kind, we can grow even faster this decade; a possibility most people have written off for now.

Jun 10, 2020 03:06 IST India Infoline News Service R. Venkataraman |

R Venkataraman, MD, IIFL Group
Reversion to the mean is said to be the iron rule of the financial markets, according to the legendary John C Bogle. It is a powerful concept indeed in stock markets. In case the returns are extra ordinary for one year, the probability of getting similar high returns in subsequent years is low. And vice versa. In other words, over the long-term, returns tend to move towards long term averages.

Long-term stock market returns are driven by earnings growth. IIFL Institutional Equities has analysed data for the last two decades and Nifty returns mirror EPS growth.

The key findings are:
  • Over last 20 years, Nifty returns are 11% pa while Nifty EPS grew at 10% pa. Interestingly, India’s nominal GDP grew at 12% pa. Nifty EPS growth has not kept pace with nominal GDP growth, whereas conventional wisdom would have advocated otherwise.
  • Good times ended in 2007 at the peak of the previous bull market. That’s why many of us do not get the feeling of good times even when Nifty made a new high. But that’s another topic.
  • Bulk of the returns were made in 2002 to 2007, when India hit headlines with India Shining to becoming part of Goldman Sachs’s BRIC nations. These days BRICS and 2020 projections are not to be heard.
  • From 2007 to 2020, Nifty returns were 3% pa. The domestic investor would have made more money simply investing in a G Sec fund.
  • Stock pickers made merry as many stocks have given phenomenal returns but we are looking at market averages.
  • The 2010 decade was a lost decade for India, especially post 2016. Demonetisation, GST, NBFC crisis, Covid pandemic and border disputes with China were among the headwinds. Even prolific Hindi movie script writers could not have thought of the hero (India’s GDP) getting battered by constant confluence of problems – one after another.
Period  Nifty returns (%) EPS growth (%) Nominal GDP  (%)
1999-2004 7 11.2 9.9
1999-2009 13.4 13.8 12.3
1999-2014 12.2 12.7 13
1999-2019 11.1 10.3 12.3
2004-2009 20.1 16.5 14.8
2004-2014 14.8 13.5 14.6
2004-2019 12.5 10 13.2
2009-2014 9.8 10.7 14.4
2009-2019 8.9 6.8 12.3
Source: IIFL Institutional Equities

Where is the silver lining in the dark clouds?

The answer not surprisingly is in the Reversion to the mean. Go back in time and relive the 2001-03 years. We had Ketan Parekh scam, dot com burst, Enron, SARS, and twin towers tragedy. Despite all these challenges, 2002 to 2007 was a block buster period.
FY21 will be even worse, given the projected GDP contraction. It will be fair to expect the NIFTY EPS to decline faster and be in range of Rs400-Rs440. When analysts’ conversations point towards Nifty PE being high, it hides the fact that earnings are depressed a bit too much.
This century had one decade of good earnings followed by one lost decade. The odds are high that normalcy will come back in FY22 and EPS growth can go back to 10% range. If God is kind, we can grow even faster this decade; a possibility most people have written off for now.

My conclusion: Use the present crisis to your advantage and put money to work. Increase your equities allocation this year. And like Rip Van Winkle, if you go to sleep and wake up in 2025, chances are a pleasant portfolio growth surprise will greet you.
One word of caution – Morgan Housel puts it very nicely – Knowing there is a reversion to mean does not mean you know when things will revert. Hence – put only that much money in Indian stocks that you can afford to forget till 2025.

This article by Mr. R Venkataraman, MD, IIFL Securities Ltd., was published in ET on June 10, 2020

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