Equities lead as best asset class: report

KARACHI: Equities continue to outperform all other asset classes by comparatively offering the best nominal and real returns during the last 16 years, analysts said on Monday. 

 “Investment in equities gave an annualised return of 24.7 percent from July 2001 to June 2017, the highest compared to treasury bills, bank deposits, national savings schemes (NSS), Pakistan investment bonds (PIBs), and capital protected strategy (CPS),” analysts at NBP Fullerton asset Management (NAFA) said in a report. 

“It was followed by CPS with annualized return of 15.7 percent and PIBs yielding 13.6 percent/year.”  The NAFA analysts, in their research report, also suggested an investment of Rs100 in equities in July 2001 would be worth Rs3,408 by the end of June 2017, whereas, an investment of Rs100 in bank deposits or T-bills in the same period would have increased to a paltry Rs243 and Rs387, respectively.  “The headline inflation (CPI) has averaged 8.1 percent per annum, and the rupee has depreciated against the US dollar by 4.2 percent per year, during the last 16 years,” the NAFA researchers said.  “A vast majority thinks the stock market is a product for large investors and always worries about the existence of speculative excesses and fear of crash by merely looking at the high index levels and short-term volatility,” the authors of the report said adding “We believe that this logic is flawed. The key determinant of the performance of stock market is corporate earnings growth.”  The report also showed that over the last 16 years (July 2001 to Sept 2017) stock market has increased from 1,366 points to 42,409 points, a rise of 3004 percent (23.5 percent /annum).

“However, despite this strong performance the market is trading at price-to-earnings ratio (P/E) of 9.5 times versus 10.5 times in 2001, means that the stock market is slightly cheaper today,” it said.  It must be noted that P/E is a widely known valuation measure that shows how much an investor is willing to pay for one unit of earnings.  “Thus, at current market level, an investor can buy a share for Rs9.5 and earn Re1 compared to buying a share for Rs10.5 in 2001 to earn Rs1.0. So, the stock market has increased largely in line with the corporate earnings and thus reflects its fundamentals,” the report said.