Fixed deposits to beat stocks over the next 3 years!

Sep 13, 2010

In this issue:
» China is not just about guzzling raw materials
» Yet another Asian central bank loads up on gold
» Throw CAPM out says noted value investor
» Time is fast running out for real estate companies
» ...and more!!

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 Chart of the day
We are doing today what we have perhaps never done before i.e., pull out an old chart and post it again without any major modifications. The reason we are doing this is because we thought the chart would be perhaps your best friend in putting today's environment in proper perspective. It shows the magnitude of returns that one can expect from the broader stock market at different dividend yields for the NSE-Nifty.

Data over the last decade shows that returns from stocks from a three year perspective can be as much as 40% if the dividend yield on the Nifty is a minimum of 1.87% or more. If one were to look at the most recent experience, such a scenario prevailed in March 2009. Indeed, stock markets have gone on to give mouth-watering returns since then. In fact, they have gone up so much in a short span of time that the dividend yield at the present level has come down to a mere 1.1%.

So, what does this imply for the returns from a 3 year perspective? Well, the chart shows that at current dividend yields, stocks could yield no more than 3% on an average annual basis over the next three years. Sadly, even fixed deposits are likely to be better investments than stocks if history repeats itself.

It should be noted that we are not doubting the India growth story. We believe India's GDP will continue to grow at a robust rate. However, Indian stocks seem to have become an expensive asset right now. And even the most attractive asset may not yield above average returns if bought at expensive valuations.

Source: NSE Website, Trend
*Data since Jan 2000, after Sep 2007, 3-yr returns taken on a pro-rata basis with a min period of 1-yr

Indian economy on the other hand continues to do well. Industrial output numbers for the month of July came out recently. The industrial production rose by 13.8% YoY during the month. This is on the back of higher production in the auto and oil refinery sectors. Looks like the growth in industrial production would fuel the economic growth of the country. Inflation though continues to be high at 9.97% for July. The economists and experts are now expecting the Reserve Bank of India to see this as a trigger to raise the interest rates in the economy. The benchmark rates have already been raised four times since March to control inflation, which continues to remain high.

How would you greet a concept that may have contributed to the severity of at least three major crashes in the US since the 1980s? What if you further got to know that this very concept is put up on a pedestal by most reputed finance textbooks around the world? And that millions of business school students are taught this concept as gospel every year? Bewildering isn't it?

The concept we're talking about is the capital asset pricing model (CAPM). The CAPM uses the concept of 'beta' as one of its foundations. Beta is nothing but a measure of the risk in an asset. This risk is in turn gauged by the volatility of the price of that asset. The more the volatility, the higher is said to be its risk.

Noted value investor David Dreman gives a striking example of the contribution of this flawed concept to the recent credit crisis. In the years leading up to the 2008 crash, the leverage piled on and garbage they were holding did not make subprime bonds 'risky' investments. Atleast according to the CAPM. Why? Because these factors are not taken into consideration in calculating beta. The beta of these bonds on the other hand was relatively low as they're price had been quite stable in the past. When housing prices fell, the markets collapsed. Many of these investments went on to lose over 98% of their value. Little wonder, Dreman wants B-Schools to give up teaching the CAPM completely and instead focus on the dangers of leverage and liquidity.

With the BSE-Sensex upward of 19,000, anybody who can raise money would, right? There is a whole line-up of real estate companies who have final approvals for their IPOs. But strangely, they are still silent. Among these companies are Emaar MGF Land, Oberoi Realty, Prestige Estate Projects, Lodha Developers, BPTP, Kumar Urban Developers and Neptune Developers. Apparently, these real estate players are wary of factors like an imminent stock market crash and competition from listed players who have lined up qualified institutional placements (QIPs).

And then there is the entire history of investors having burnt their hands in real estate stocks the last time around. If and when these IPOs come up, the emphasis this time will surely be on execution track record, transparency and management of the company rather than just the land bank on its books.

China's clout in the global economy has been significantly rising in recent times. The country has already toppled Japan to become the second largest economy in the world. It is the largest holder of US Treasuries. And has also beaten the US to become Brazil's largest trading partner. Especially with respect to the latter, China has been importing vast quantities of iron ore from the Amazon jungle. This is to build plants, and industries in booming Chinese cities.

But guzzling raw materials in other developing economies is not the only aim of China. The dragon nation has also begun making investments in infrastructure and industry in those countries. And in many instances this has been possible due to its cut-price and increasingly sophisticated manufacturing companies. Not to mention, the attractive financing terms it can offer. Moreover, the picture in the US and Europe still remains bleak. And so China is looking to utilize its vast holdings of foreign currency. It is then pouring this money into developing economies. This will in turn drive up the demand for its own goods. Little wonder then one is witnessing perceptible shifts in the global economy with China in the forefront. It will have to however make sure that it does not rub its trading partners the wrong way.

First it was India, and now it is Bangladesh. We are listing down the names of countries that have been in news over the past one year for buying gold from the IMF. The Bangladesh central bank was in the news recently for having bought 10 tonne of gold from the IMF at the closing price of September 7. This adds to IMF's 212 tonne of gold sales this year, to countries like India, Mauritius, and Sri Lanka.

Asian central banks have been at the forefront of buying gold from the IMF. This follows an uncertain outlook for two of the world's major reserve currencies - US dollar and Euro. Earlier this year, there were reports that China was also preparing to buy gold from the IMF. But the Chinese central bank had refuted these as rumours.

Indian stocks markets looked in rip-roaring form today as the BSE Sensex has not just crossed the 19,000 market comfortably but was trading with a gain of more than 400 points at the time of writing. Banking heavyweights were seen driving majority of the gains on the index. Other Asian indices also closed quite firm today whereas Europe is also witnessing strength currently.

 Today's investing mantra
"The risk among any group of investors is that they only pay attention to what they already agree with. That's limiting in our opinion, and dangerous." - Michael Mauboussin

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10 Responses to "Fixed deposits to beat stocks over the next 3 years!"


Jun 22, 2011

Can we have the current dividend yield vs nifty return chart?



Sep 25, 2010

Why are you running an equity recommendation service if you believe that fixed deposits can earn more? Dividend yield is low is well known to all investors so why compare this with FD? Stocks appreciate but FDs do not. That is the basic difference. Inflation eats away the returns from FDs. Anyone inclined to invest in safe fixed returns should invest in EPF, PPF, Post Office Time Deposits, RDS etc and would earn better than company FDs and in a safer way.



Sep 17, 2010



venkateswara rao

Sep 15, 2010

I want to invest in shares which share is best.


sanjay kumar

Sep 15, 2010

tell me all info of investment

Like (1)


Sep 14, 2010

I feel no body invests in equity only for the sake of dividend yield.

Equity investors want capital appreciation .Dividend yield is only incidental to that.

Is it correct or not?

Like (1)

saurabh rai

Sep 14, 2010

i want to join your company by internet
so what i will do.

Like (1)

praveen bhargava

Sep 13, 2010

"FIXED DEPOSIT"is an instrument in the hands of the investor who play safe and secure.It goes only in one direction i.e. to grow slowly but consistantly.This instrument follows the principal of "Slow and Steady Wins The Race"and always in favour of Tortoise in the race with Rabbit here in comparison to "STOCKS".
"STOCKS"are always on wheels and all the times on move in the higher side or lower side depending on the situation facing the stock market.It is a fast moving investment with a bit of risk.It can give many fold returns in a short time and can take off any percentage off the table in a short time.All in all it is a risky instrument.
The future of "FIXED DEPOSIT"is bright and it is certain that it will give a fixed return in the next 3 years.
The future of "STOCKS"is uncertain and it can go either way in the next 3 years.But one thing is certain.History repeats itself.On this account it is almost certain that the Stocks will give much more returns in comparision to Fixed Deposits in the next 3 years seeing the robust growth of Indian Economy of the last 10 years or so is any indication for the future.
So if I have been asked to invest Rs.1 lakh for the 3 years period I will surely invest in Stocks in an intelligent way and not go for Fixed deposits for the next 3 years.

Like (1)

dipak kumar das

Sep 13, 2010

Iam interest next3yearinvest plese guid me

Like (1)


Sep 13, 2010

But what will happen to industrial or economic? The govt. is planning to do away with the public debt

Like (1)
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