Given the volatility in returns across most asset classes, including gold, long-term investors may need to rejig their portfolios. Even as experts expect the volatility to continue for some more time, the big question is: which asset class is likely to top the return and risk-adjusted return chart in the coming decade? A recent Morgan Stanley report on returns and volatility of returns across five key asset classes (oneyear bank deposits, 10-year government bonds, gold, property, and equities represented by the BSE Sensex) may hold the answers. Take a look.
Equities: The BSE Sensex is expected to deliver annual returns of 14 per cent over the next 10 years, and these are likely to be less volatile than in the previous 10 years. Return volatility in the coming years is likely to be reminiscent of the post-1987 period, when the numbers moderated after scaling a peak. The fundamentals of India Inc are strong and are backed by a steady domestic growth, robust balance sheets, high capital efficiency and the likelihood of decoupling from the rest of the world. Thus, on a risk-adjusted basis, equities are likely to remain the best performing asset in the coming decade.
Gold: Morgan Stanley predicts a tepid outlook for the next five years. Gold has delivered positive returns for 12 consecutive years. However, annual returns are likely to flatten over the next five years after the metal touches a new peak in 2010 and then gradually declines in the subsequent years.
Property: Surprisingly, this has been the worst performing asset class in the past 15 years. However, the tide seems to be turning as the price outlook is favourable now. The increasingly accessible and affordable home loans, along with the recent correction in property prices, raises the appeal of this asset. In addition, over the coming years, demographics, rapid urbanisation and the rise in the number of nuclear families will further drive demand for property.
Bonds/Deposits: The one-year bank deposit and the 10-year government bond finished at the bottom of the charts in terms of returns for 10 years and five years due to the disadvantage of the duration. This asset class is likely to continue to underperform for the next few years. The long-term returns implied in the current yield of 7.6 per cent make bonds unattractive even on a risk-adjusted basis. In a fast-growing economy like India, bank deposits will continue to suffer due to the duration involved and, hence, underperform compared with the other investment options.
Trivia and telling figures
