Inflation negates investor gains
Despite an almost 7% rise in Sensex since July 2009, investors in Indian equities are still poorer by `10 lakh crore due to the impact of high inflation, argues
It is not just the Europe woes and the market sentiment meltdown that have savaged equities over the last year. Inflation, too, has extracted its pound of flesh from an already emaciated investor.
Inflation has been on a steady rise for the last 29 months, negating whatever marginal gains the market had posted during the period. It has swatted away over `10 lakh crore in investor wealth during the period. And the marginal market gains actually turn negative if adjusted for inflation.
The benchmark Sensex, at 15670.31 at the end of July 2009, closed at 16739.01 yesterday, a rise of 6.82%. In the same period, the Wholesale Price Index has gone from 128.2 to 156.9, or up 22.38%.
This makes the real rate of returns from equities a negative 15.56%. (The real rate of return is obtained by subtracting inflation from absolute returns.)
During this period, the total value of all listed companies on the BSE rose from `48.08 lakh crore to `56.38 lakh crore. The `8.3 lakh crore rise in absolute terms, when adjusted for inflation, actually decreases by `2.46 lakh crore! In other words, inflation has eroded `10.76 lakh crore of investor wealth.
There is an inverse correlation between inflation and market returns, says Sachchidanand Shukla, economist at Enam Securities. “Real returns get hurt due to high inflation. In addition, the market is de-rated in anticipation of interest rate hikes because growth is sacrificed to control inflation,” he says.
The Reserve Bank of India has hiked interest rates 13 times since March 2010. Companies begin to trade at lower multiples to their earnings as the stock market discounts a slowdown in earnings.
The Sensex has dropped from trading at 21.77 times earnings in August 2009 to 16.23 times currently. Investors tend to switch out of rate-sensitive companies during times of high inflation, says Saibal Ghosh, chief investment officer, Aegon Religare Life Insurance Company. “They try to put their money into companies with better pricing power, those with better brands and a better sales network. This trend has already played out this time as well.”
Stock market returns still beat inflation over longer periods of time, said Chokkalingam G, executive director and chief investment officer at Centrum Wealth Management. “This has been a peculiar period because of issues in the Middle East, Europe and also the United States. If investors look at a ten- to 15-year horizon, then equities still beat inflation.”
Inflation has been at 5.62% over the last 15 years. Equities have given average returns of 18.3% in the same period. Inflation, Shukla says, is expected to moderate in the days ahead. “Barring erratic monsoons and geo-political risks, inflation is expected to be lower than the previous two years. We expect average inflation to be at 6.5% for the financial year ending March 2013.”
Despite an almost 7% rise in Sensex since July 2009, investors in Indian equities are still poorer by `10 lakh crore due to the impact of high inflation, argues
It is not just the Europe woes and the market sentiment meltdown that have savaged equities over the last year. Inflation, too, has extracted its pound of flesh from an already emaciated investor.
Inflation has been on a steady rise for the last 29 months, negating whatever marginal gains the market had posted during the period. It has swatted away over `10 lakh crore in investor wealth during the period. And the marginal market gains actually turn negative if adjusted for inflation.
The benchmark Sensex, at 15670.31 at the end of July 2009, closed at 16739.01 yesterday, a rise of 6.82%. In the same period, the Wholesale Price Index has gone from 128.2 to 156.9, or up 22.38%.
This makes the real rate of returns from equities a negative 15.56%. (The real rate of return is obtained by subtracting inflation from absolute returns.)
During this period, the total value of all listed companies on the BSE rose from `48.08 lakh crore to `56.38 lakh crore. The `8.3 lakh crore rise in absolute terms, when adjusted for inflation, actually decreases by `2.46 lakh crore! In other words, inflation has eroded `10.76 lakh crore of investor wealth.
There is an inverse correlation between inflation and market returns, says Sachchidanand Shukla, economist at Enam Securities. “Real returns get hurt due to high inflation. In addition, the market is de-rated in anticipation of interest rate hikes because growth is sacrificed to control inflation,” he says.
The Reserve Bank of India has hiked interest rates 13 times since March 2010. Companies begin to trade at lower multiples to their earnings as the stock market discounts a slowdown in earnings.
The Sensex has dropped from trading at 21.77 times earnings in August 2009 to 16.23 times currently. Investors tend to switch out of rate-sensitive companies during times of high inflation, says Saibal Ghosh, chief investment officer, Aegon Religare Life Insurance Company. “They try to put their money into companies with better pricing power, those with better brands and a better sales network. This trend has already played out this time as well.”
Stock market returns still beat inflation over longer periods of time, said Chokkalingam G, executive director and chief investment officer at Centrum Wealth Management. “This has been a peculiar period because of issues in the Middle East, Europe and also the United States. If investors look at a ten- to 15-year horizon, then equities still beat inflation.”
Inflation has been at 5.62% over the last 15 years. Equities have given average returns of 18.3% in the same period. Inflation, Shukla says, is expected to moderate in the days ahead. “Barring erratic monsoons and geo-political risks, inflation is expected to be lower than the previous two years. We expect average inflation to be at 6.5% for the financial year ending March 2013.”
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