Wise Advice

Mr. Bond's data suggests likely equity returns over next 3 years

Sunil (Mr.Bond) Jhaveri, MSJ Capital, Gurgaon

Continuing his new series of articles on equity investing, Mr. Bond draws an interesting observation from patters in 10 yr Sensex rolling returns and equity performance thereafter. In 98% of cases where the 10yr Sensex rolling return was less than 7%, equity returns in the next 3 years were above 20% CAGR. Currently, the 10 yr Sensex rolling return - at 7%, is well below that 9% threshold. Statistically, can one conclude that there is a 98% probability of equity returns over the next 3 years being higher than 20% CAGR?

In the first article (Click Here), I had written about What Not to Do rather than What One Should Do while selecting equity as an asset class for investment in Investor portfolios. This article will highlight some interesting correlation between Sensex 10 Year rolling returns & performance of Equity as an asset class post that.

I did some analysis of Sensex 10 year rolling returns & came to some interesting conclusions. Please note that these are only statistics at the end of the day. Hence, please treat it as such & take an informed decision based on other Macro parameters prevalent at the time of investments.

Whenever Sensex 10 Year rolling returns have delivered less than 9% & an investor invested in Sensex at that point; Sensex returns over next 3 years have been phenomenal. Following chart depicts this. Blue line is when Sensex delivered less than 9% since 1990 till December 2016 & orange line depicts 3 year rolling returns in Sensex for investments made thereafter:

Following break up of returns band will make it even more clear on how this analysis has done

Above table shows that whenever 10 year Sensex Rolling Returns had delivered less than 9% & if an investor had invested at such points in time & held the same for 3 years thereafter, almost 98% of the observations (total observations when 10 Year Sensex delivered less than 9% is 1028 from 1990 to December 2016) have delivered more than 20% returns over next 3 years thereafter. Only 2% observations delivered between 0-20% (& all these were when 3 year got completed during 2008 correction period & none of them were negative).

Currently, Sensex 10 Year Rolling returns are 8.91% (was less than 7% until a month ago) & hence an indication that if someone were to invest now & hold it for 3 years from hereon; probability of delivering decent returns is quite high (of course as mentioned earlier, please correlate with other macro factors prevalent in the Indian & World economies & then take an informed decision).

Content is prepared by Wealth Forum and should not be construed as an opinion of HDFC Mutual Fund.

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