Equity has been a poor asset class over the past decade. Imagine you bought the Nifty 10 years ago - which was almost the peak of the bull run in October 2007. Your return would be zero. But if you bought the 10-year bond, you would have made 8% per annum.
Above is the equity risk premium, which is the gap between equity return and bond returns. So equity returns minus bond returns is in negative territory because equity has not generated any return. So there is a lot of pent up return that equity needs to deliver.
Going forward, returns are unlikely to match the historical average of the past. The Sensex has done around 16% CAGR since the early eighties, going ahead, 12-13% is a much more realistic benchmark.
Profit share of GDP had risen very dramatically between 2004 and 2008 and then sharply corrected. It will probably mean revert, which means that profit growth will surprise on the upside over the next 5 years.
I expect earnings from the Nifty to compound at about 20% and so stocks should do the same, if not more. That is why I believe the Nifty or Sensex could triple in the next 5 years.
