Crisis may be a good time to stay put: Analysis
As investors’ wealth gets eroded across global mkts, it may not exactly be time to pontificate, but it may be pertinent to point out that history rewards brave handsomely.
By Shailesh Dobhal & Bhanu Pande, ET Bureau |
NEW DELHI: The current turmoil in the global stock markets is not for the faint-hearted. As investors��� wealth gets eroded across global markets, it may not exactly be a time to pontificate, but it may be pertinent to point out that history rewards the brave handsomely.
No wonder then, after the two big financial crises of the recent past ��� the 1970s oil shock and early 2000s dotcom bust ��� investors in the US, the UK, Japan and Germany, who remained invested or entered the markets during the time of these crises reaped supernormal profits in the year immediately after the crises abated.
The Equity Risk Premium (ERP) ��� calculated by subtracting the average income return from a riskless asset from average stock market total return ��� analysis of stock market crises (pre-, during and post-1973-74 and 2000-2002) in the US, UK, Japan and German underlines this trend of windfall profits in the year immediately after the crises.
ERP helps benchmark expected returns based on historical trend. The US-based valuation & transaction advisory company American Appraisal did the ERP analysis exclusively for ET using data from Bloomberg and the ���International Equity Risk Premia Report 2008��� published by investment data firm Morningstar.
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Take the 1973-74 oil crisis, for instance. Realised return (ERP) for US investors in 1975 was 27.5%. It was a high of 134% for investors in the UK, 32% in Germany and over 12% in Japan. In comparison, long-term pre- and post-1973-74 crises ERP was 8.6% and 7.8%, respectively, for the US market.Move to the 2000-2002 dotcom bust, and the trendline still holds across markets. In 2003, the US stock market���s ERP stood at 24%, UK���s 14%, Germany���s 33%, and a handsome 22% even in Japan! Again, long-term pre- and post-crisis ERP was a more humble 9.9% and 8.3%, respectively, for the US market, 9.5% and 9.7% for the UK, 5.8% and 13.7% for Japan and 11.5% and 19.8% for Germany.
The ERP message here seems simple ��� if you can keep your wits, not panic, a crisis may be a good time to invest or stay put. For, if you have the appetite and wherewithal, there could be a pot of gold at the end of a roller-coaster ride. A similar ERP analysis on Indian markets for the 1973-74 and 2000-02 crises could not be done, since data on risk-free rate (the 10-year government bond) is available only post-late 1990s, when the market become liquid, according to American Appraisal.
Low base effect, as equity markets nose dive during a crisis, only part explains such high profits immediately after every past crisis in the world markets. American Appraisal managing director Varun Gupta says: ���After the crisis, when markets turn around, the stashed away excess liquidity starts pouring into the markets, and people start jumping into the markets, and this translates into a bonanza for existing investors.���
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