NSE plans to launch SME exchange platform this month

NSE vice-president, K. Hari said “We have got final approval from SEBI. We will launch the platform this month”

The National Stock Exchange (NSE) aims to launch its Small and Medium Enterprises (SME) exchange platform this month.

“We have got final approval from SEBI. We will launch the platform this month,” NSE vice-president, K. Hari said on the sidelines of a FICCI-organised seminar on MSME financing.

The NSE received the Securities and Exchange Board of India’s (SEBI) nod to start its proposed SME exchange in October this year.

The SME exchange will be a separate platform within the NSE. The platform is expected to offer SMEs opportunities to raise equity from the market and unlock the intrinsic value of these enterprises.

“A lot of companies have shown interest in the SME platform. We have interacted with more than 50 to 60 companies,” Hari said.

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Bonds beat stocks in the US. Will it happen in India?

US bonds beat stocks over 30 years. This is a shocker for financial experts who insist that stocks always beat bonds over the long term

According to a recent research by Jim Bianco, president of Bianco Research in Chicago, from September 1981 till September 2011, long term government bonds of the US have gained 11.5% a year on an average compared to the S&P 500 index which has delivered 10.8% for the same period. This has come as a shocker to a popular belief, which is now almost an orthodoxy—stocks are obviously better than bonds over the long term. All over, every investing strategy is based on the assumption that stocks perform better than bonds over the long term. Taking on extra risk from stocks is expected to yield better returns.

To see just how rare the situation is look at what Jeremy Siegel, author of the book Stocks for the Long Run found out. The last time bonds posted their first 30-year gain was 150 years back in 1861, at the onset of the Civil War. In his book, he has compared returns of stock and bonds over 1,2,3,5,10,20,30 year holding periods from 1871 to 2006 and has concluded that stocks have outperformed bonds in majority of the periods. As the holding period increases, the probability that stocks will outperform fixed-income assets increases dramatically. Even calculated from major market peaks, the wealth accumulated in stocks is more than four times that in bonds where the holding period has been 30 years.

But if is it really not so, under what circumstances do bonds beat stocks? And can it happen in India as well?

The US rally in bonds has been fuelled by low inflation levels, slower economic growth and the Federal Banks’ decision to keep interest rates extremely low for a very long time, which is an unusual situation. Along with this, savings of the US households rose over the past several years. The US savings rate has tripled since 2005. The increased savings have not been channeled into stocks but safe assets like US Treasuries, leading to a higher return from Treasuries compared to stocks at least over the past 10 years. American households, under the fear of high unemployment and insecurity of the capital market, chose safer investment products such as bonds. According to data compiled by Bloomberg and the Washington-based Investment Company Institute, debt mutual funds have attracted $789 billion since 2008, compared with a $341 billion drop in equity funds.

Another new phenomenon over the last decade is, countries with large current account surpluses like China buying US Treasuries, pushing bond prices up further. More importantly, thanks to two major economic dislocations of 2001 and 2008, low interest rates have not fuelled a bull run in stocks as is normally expected. This is something that market experts were not at all expecting. An extended period of low interest rates always leads to higher stock prices.

Does this mean that bonds will perform better than stocks in future as well? Antti Ilmanen, in his book Expected Returns, warns that any sample period maybe biased, especially if the sample starts or ends at times of exceptionally high or low market valuations. The same can be said for the current sample, where bond yields were at an all-time high in September 1981, going above 15%, which itself was an exceptional situation. Ever since, it has been following a downward trend and is now trading at its lowest in more than half a century at around 2%. On the other hand, the US equity markets faced two major setbacks in 2001 and 2008.

Bonds Vs Stocks in other countries

Stock markets outperformed fixed income markets during the past century in all countries studied by Ilmanen. The compound average real return for global equities between 1900 and 2009 was 5.4%, which is 3.7% higher than that of long-term government bonds. Over 20-year or 30-year horizons, stocks have always beaten bonds. A few exceptions to it occurred outside the US in the 20th century and inside the US during the 19th century and the recent one.

The overwhelming evidence proves that bonds beating stocks could be a freak occurrence that will right itself, either by stocks going higher or bonds going lower. Indeed, after the hundreds of billions that the US Fed has pumped into the system, many experts feel that inflation, higher interest rates and a fall in bond prices are now looming possibilities.

As far as India is concerned, we are simply not comparable to the US in any respect. We don’t have an active government bond market, limited currency convertibility and therefore we do not attract foreign and retail savings easily. In that sense, bond prices would be less distorted due to a flood of money. Indeed, the biggest source of money into Indian financial markets—from foreign institutional investors—favours stocks. Indian stocks continue be attractive for what they are—vehicles for sharing increasing profits generated by the corporate sector. Indian bonds have outperformed equities only during 1996-2002 because bonds yields were high in 1996 and equities were low in 2002.

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COMMENTS

Deepak R Khemani

5 years ago

This article should be forwarded to EVERY so called FINANCIAL PLANNER in India especially the ones who appear on TV and in the Pink Papers (Now even TV Anchors have starting advising which schemes to invest in) and advise people left right and center to invest in EQUITY for the LONG TERM as " Equity has always beaten debt over the LONG TERM".
Nobody knows how "LONG" long term is.
Historically Indian Markets have given 15% + returns so they will keep on giving similar returns for the next 20-25 years and fancy presentations about achieving 1 crore, 2 crore and 5 crore corpus for Children Education, Marriage and Retirement are put out to unsuspecting viewers/ readers.
Asset allocation is the KEY to investments and a BALANCED approach is the best to take advantage of reasonably high returns given by bonds and "LONG TERM" growth potential of the Indian markets going forward!

Amit

5 years ago

for the last ten years or even the last fifteen, bond have outpefrmed equities even in Inda (IBex returns are better than Sensex returns.)

India has an active G-Sec market...

REPLY

Moneylife Team

In Reply to Amit 5 years ago

As as far as we know ibex returns are not better than Sensex

ibex in 1996: 970
ibex in 2001: 1150
ibex in 2011: 1240

Sensex in 1996: 3000
Sensex in 2001: 3500
Sensex in 2011: 17000

Amit

In Reply to Moneylife Team 5 years ago

Sir,

the I-Bex data is freely available on the weblink http://icicisecuritiespd.com/ASP/fixedin... and the file downloaded shows the following:

I-Bex:
1994: 1000
2001: 2137
Nov 3, 2011: 5722

This is a cagr of around 10.5% to 11%

The Sensex data shows a cagr of roughly the same number albeit with volatility.

This inspite of the India Growth Story and the death of debt and low inflationary era and fiis pumping money in India and what not...

Devesh

In Reply to Amit 5 years ago

That is the reason to have asset allocation. In fact, if you add Gold, it is even better.

Jigar

In Reply to Devesh 5 years ago

absolutely correct

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