Signage for CNX Nifty Index is displayed as employees walk through the atrium of National Stock Exchange in Mumbai. (Photographer: Dhiraj Singh/Bloomberg)

Equity To Be India’s Best-Returning Asset Class In A Decade: Morgan Stanley

Equity is expected to be the best-returning asset class in the country in the coming decade even as average returns remain lower than in the past 25 years, Morgan Stanley India said in a report that was released today.

“Equity returns can be powerfully mean reverting,” Ridham Desai, managing director at the investment banking and financial services firm, told reporters. “The returns are likely to reverse to long-term mean levels at around 16-17 percent over the next decade, owing to improvement in corporate earnings and gross domestic product growth.”

Over the next five years, corporate earnings are expected to grow at a compound annual growth rate of 20 percent. “The worst is behind us, so we will see stellar growth from corporate banks,” Desai said, suggesting the beginning of an earnings cycle.

That comes in the backdrop of a continuous decline in equity returns over the past 25 years, which touched their lowest three-year moving average of 12.5 percent between Oct. 2013 and June 2015, according to Morgan Stanley. That only improved marginally to 13 percent in the period between July 2015 to date, as banks reported losses due to large non-performing loans.

The country’s GDP, according to the report, will grow at an average of 7 percent over the next ten years to $6 trillion by 2028, with per capita income rising to $4,100, led by higher investments, exports and consumption contributing to growth.

India’s medium-term growth trend will be supported by the interplay of the structurally positive factors of demographics (strong growth in the working age population), reforms (including recent changes to tax laws and India’s digitization drive that can help improve productivity) and globalisation (accelerating productive job opportunities, income and saving).
Morgan Stanley Report.

“India’s growth will translate into earnings growth, then you probably get a similar type of outcome for the stock markets,” Desai said. The only caveat, according to him, would be a lower inflation than what has prevailed over the past 25 years, which would slightly reduce nominal rupee returns.