How quickly half the year is done. There has been almost no place to hide for investors.
All asset classes have returns less than inflation, and most have had negative performance in 2022 till June. Inflation, as we expected, continues to remain elevated. The new measures proposed by the government on long-term capital gains will further depress real returns after taxes for investors. We have been flagging the increased risks and possible lower future expected returns compared to the performance of assets over the previous decade. The trailing 1 year P/E ratio of the S&P BSE 100 was at it’s 55th percentile of historical trends as of June 30, 2022. However, the cyclically adjusted P/E ratio for India is still elevated at the 77th percentile of the distribution of historical values. Despite the pullback in the markets, they are not necessarily “cheap” using history.
Against this backdrop, we retain our long-term expectations of returns and risks for our asset classes. The elevated valuations for equities imply that forward return expectations should be lower. We retain our long-term returns and fixed-income risks but would caution investors with a short-term investment horizon to be more circumspect. Historically, high inflation periods have experienced lower nominal returns across asset classes generally. We do not expect the current period to be any different. A well-diversified portfolio remains a good alternative for most investors, despite the lower expectations of future returns. Chasing returns potentially increases risk significantly. Consult your financial advisor and review your portfolio against your financial objectives.
Table 1: Risk Return Long Term Expectations
Note: We use a broad sample of instruments accessible to retail investors such as mutual funds and ETFs to compute the pre-tax total returns. Each asset class is a collection of individual instruments. For instance, Cash and Cash Equivalents include Fixed Deposits as well as Liquid Funds. Data is over a long time period, and we overlay historical returns with future expectations of returns to arrive at the expectations. Our time horizon of expectation is 5-7 years. An investor cannot invest directly in the asset class. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Assert class returns do not include any expenses, fees, transaction costs, or sales charges, which would lower performance. For illustrative purposes only. Past performance is no guarantee of future results. Real results may vary.
Our long-term expectations of returns and risk serve as the basis for building the baseline “desired zone” of expected Return and Risk for different risk profiles in the Qfinr app. Our approach generates over 3 million portfolios of varying allocations to the five asset classes from which we select risk-return trajectories for each of our five risk profiles.
For a medium-term investment time horizon (3-5 years), the asset allocation that investors could consider:
Table 2 : Asset Allocation Ranges
Note: These allocations are not based on any individual circumstances or needs. To determine the allocation for your specific circumstances, risk tolerance, time horizon please consult with your financial advisor.
Users can compare their portfolios’ expected returns and risk characteristics against ‘ideal’ portfolios in qfinr. This analysis can be a useful input for discussions with their financial advisors.
PS: If you want to know more about historical returns of asset classes in India, read ‘Historical Nominal and Real Asset Returns in India’. Our team has also published a paper on the valuations in the equity markets and the forward returns titled ‘Shiller’s CAPE and Forward Real Returns in India’ that might be of interest. For a detailed review of the international experience on investment returns during inflation see ‘Investing in Deflation, Inflation, and Stagflation Regimes’.
Qfinr is not a financial product advisory service and does not provide any financial product advice specific to your circumstances. We provide numeric information only based on data entered by the user and/or data otherwise available to us and the output presented is derived from that information as a result of calculations using our methodology. This output is not a recommendation nor is it a statement of opinion. It is not a solicitation or attempt to effect transactions in securities or the rendering of personalized investment advice. As such, the information should not be construed as being personalised financial, investment or professional advice, nor should be deemed to constitute as an offer or provision of such advice.