15% RETURN ON SENSEX IN LONG TERM

Investors can expect an annualised return of over 15 per cent from the stock market in the long term from the current valuations -- earning them a premium of 7-7.5 per cent over the returns from the relatively risk-free government bonds, says a study. "Current Sensex market capitalisations imply a long-term return expectation of over 15 per cent," according to the study conducted by global consultancy major PwC about Indian markets. PwC said that the projected long-term return of 15.2 per cent for the 30-share index Sensex is based on the current market capitalisations, free cash flows and the expected growth rates. This would imply an Equity Risk Premium (ERP) -- the difference between the returns from higher-risk equity market and those from the relatively risk-free government bonds -- of 7.2 per cent at the current level, given a yield of 8.05 per cent on 10-year government securities December 31, 2012. "The study concludes that considering the daily fluctuations in equity market valuations as well as government security yields, the current ERP can be considered to be in the 7 -7.5 per cent," PwC said, adding that the equity risk premiums are dynamic and subject to constant change. ERP is the excess return that an investor expects as compensation for bearing the risk of investing in the equity markets, instead of investing in a risk free asset.
While there are no securities that are 100 per cent risk free, the yield on the 10-year rupee denominated government securities can be considered as a suitable proxy for a risk free rate, the study said.