“History will not only repeat,” says Phani Shekhar, “but will also rhyme.” The fund manager with Angel Broking expects a revival of the equity cult that a recent Citibank report declares ‘dead’ in Continental Europe, ‘sick’ in the US and UK, and weak everywhere else except emerging markets. What has arisen in its place is a ‘bond cult’.
Since 1958, when America’s equity boom began, corporate shares have rewarded their holders handsomely. For decades, annual dividend yields stayed consistently below bond yields, a reflection of high market demand for shares—which, unlike fixed-coupon bonds, saw dividends increase year after year. Market prices of shares also rose in line with profits, granting returns on the basic value of these assets as well. But in recent years, regulatory insistence on debt purchases, maturing US demographics and bouts of risk aversion have seen vast amounts of capital switch from equities to bonds. The result: bond yields have fallen below equity yields.
Given the Great Recession’s erosion of wealth, says Shekhar, “It would be naïve for anybody to believe that investors would flock back to equity markets so early after such a great shake-out.” Nervous investors in the West are more worried about conserving wealth than increasing it, a magnified form of the ‘loss aversion’ behaviour outlined by Kahneman & Tversky’s Prospect Theory: ‘People are far more heavily motivated by avoiding a loss versus making a gain.’
Yet, an obituary of equities would be vastly exaggerated, since loss aversion is largely irrational and can be exploited by savvy bargain-hunters. By the Citibank report, markets where the equity cult is ‘dead’ offer a buying opportunity, and where it is ‘sick’, shares could become a ‘buy’ once bonds become a ‘sell’. But there is no saying when the bond mania lifts. Right now, real yields on short-term US and German sovereign bonds are negative, an absurd outcome of panic. Once the West’s current crisis of public and private over-indebtedness is over, which would take an economic revival, vast sums of capital could return to equities.
That would revive the equity cult in the West. Yes, regulations will be tighter and investors more conservative this time round, but this “will help build confidence back into equity markets”, says Nirupama Soundararajan, an expert with Ficci. India’s own equity cult, meanwhile, perhaps needs to be reset more than revived. Distracted by big returns off rising share prices, it got off to a false start. It will help if investors focus on dividend yields, not ticker tapes.