Equities will beat gold in the next decade, bets Morgan Stanley

If the last decade belonged to gold, this one will belong to equities. Or so Morgan Stanley would have us believe.

Gold gave annual returns of 17.1% over the last 10 years, compared with 16.8% by equities.

The yellow metal has also been less volatile during this period, with volatility at 11.3% compared with 40.1% for equities.

Though investments in the stock market will remain riskier, albeit slightly less volatile than in the previous decade, they are likely to beat the returns from property, fixed income alternatives and gold during the current decade, Ridham Desai, Sheela Rathi, Utkarsh Khandelwal and Amruta Pabalkar wrote in a report dated February 14.

“The risk-reward ratio for Indian equities makes it the most attractive asset class in the coming decade,” the report said.

Other experts too feel the Indian markets, which have corrected almost 15% from their recent highs, provide an ideal opportunity for retail investors.

“Many of the concerns have been factored in the recent correction. The interest rates may not rise much from here and even inflation should fall from here, on base effect. Though the scams are keeping the markets in uncertain territory —- and which may persist in the near term —- the markets are looking quite attractive from a valuations perspective, trading at around 14 times one year forward earnings,” said Ajay Parmar, head of research at Emkay Global Financial Services.

Experts, however, caution that crude oil prices could queer the pitch for equities.

India meets much of its energy needs through crude oil imports and any rise in prices affects inflation as well as the fiscal deficit.

“Upside in near term would depend on a correction in energy prices and any positive development from the government,” said Gopal Agarwal, head of equities at Mirae Asset Global Investments.

Meanwhile, returns from gold are expected to flatten after making a new peak in 2011 and possibly even decline, according to Morgan Stanley’s global commodities team.

Asset classes such as property, which gave returns of 15.3% over the last ten years, are expected to be driven by demographic factors and urbanisation.

Experts advise diversification and investment across asset classes to get safer and decent returns over the long term.

“In terms of returns, Indian equities are expected to outperform other asset classes over the next ten years. But gold is an asset class, which can provide some amount of stability to a portfolio in times of economic distress,” said Swapnil Pawar, chief investment officer at Karvy Private Wealth.

Tarun Bhatia, director - capital markets, Crisil, said, “Gold as an asset class is expected to give around 15% CAGR returns over a longer time horizon and is a safer bet than equities, which tend to be more volatile. One should therefore allocate a portion of their investments towards this asset class. One should ideally try to invest in equities and gold through the SIP route as investing systematically prevents the risk of timing and helps generate better returns, whatever the market conditions.”