Thursday, February 01, 2007

Sensex an underperformer over the last 15 years!

My boss pointed me to some interesting facts yesterday, one of them is the fact that the Sensex which has been rocking in the past 2-3 yrs, has been an underperformer vis-a-vis debt over the last decade and a half. Here's the computation,

Int. rates during early nineties were close to being somewhere in the range of 12-14% per annum. So effectively, money put into a FD would double in 5-6 years (rule of 72). They stayed in this range for almost the entire nineties. So effectively, if one were to invest Rs.100,000 at the beginning of the nineties, the investment would have grown to:

Rs.200,000 by mid-nineties and close to Rs.350,000 by the end of nineties. Thereafter, interest rates have averaged at around close 7-8 per annum, so Rs.350,000 would have become something like Rs.500,000.

Returns - 5 times over the original investment, or a compounded avg. of close to 10.6% per annum.

Now, in early nineties, the Sensex was quoting at close to 3,000 levels. Today, the same is around 14,000. This comes to pretty much the same, ie around 10 per cent per annum, though when it comes to compounding, even a 50 basis point difference is quite significant.


Btwn, I noticed a few things over the last few days:
  • SBI is currently offering interest rates of close to 10.2% per annum (compounded quarterly or semi-annually, i think) for FDs over a period of three years, and
  • Force Motors is offering interest rates of close to 12 per cent per annum for a FD of a similar tenure.
I find this very interesting. Indian markets are currently quoting (in terms of p/e ratio) at around 20 times trailing, ie. an earnings yield (inverse of p/e ratio) of 5%.....less than half being offered on FDs by companies such as those mentioned above.

This means, Corporate India is quoting at levels where its earnings yield a mere 5 per cent per annum as compared to banks or some companies which are offering interest rates of close to 10 per cent. Both I think cannot co-exist for long. So what will move first? Interest rates (down?) or corporate india's valuations (down?).


Vinay said...

What u r saying sounds very interesting. Keep up the good work.

Anonymous said...

What about the taxes. Is it possible to keep reinvesting the interest earned on a FD without paying tax on it?
Also what about dividends on the sensex and reinvesting them?

Ravi Purohit said...

Anonymous: Good point. However, one needs to think about the following: a).long & short term gains were not tax-free b).there were no index funds available, so u were really looking at managing the index basket on your own, which means incurring transaction costs (and mind u those were substantially higher in early-to-mid nineties) and c).index constituents have undergone dramatic change over this period, thereby resulting in high amounts of churning in the overall index portfolio.

I think net-net both the investments would have produced similar results give or take 0.5-1 percentage points.