aswath damodaran: Malaise in market will last longer if investors behave like it’s the 70s: Aswath Damodaran The Economic Times

India’s risk premium benchmarked against the US calculated by one of the websites countryeconomy.com suggest that the risk premium has increased from a low of about 390 points in December 2016 to currently at about 449 points. A few segments of the US stock markets have run up significantly in the last one year, but that is not enough to convince Brett Nelson, Head of Tactical Asset Allocation, Goldman Sachs that Wall Street is in the bubble territory just yet. Brett Nelson said in a recent podcast hosted by Goldman Sachs that equity risk premium is still attractive at this juncture, even though 10-year bond yields have risen, quashing the bubble theory, in his view. In the last one year, NASDAQ has zoomed 69%, while Dow Jones and S&P 500 have surged in the range of 40-45%. Indian stock market has witnessed a very high growth rate in the last one decade. India being one of the fastest growing economies, both domestic as well as foreign investors are infusing a lot of money into Indian equity market.

Tagging LVMH to a particular country’s equity risk premium may not be appropriate,” he added. “If a global business listed in the US has majority of its offshore revenue from countries with macro risk, that should be accounted for in overall equity risk premium for the stock,” said Pratik Oswal, head of Passive Fund Business, Motilal Oswal AMC. The downturn in equity prices was witnessed during this phase led by worsening outlook on earnings and rise in ERP, with interest rates causing negligible impact as illustrated by the DDM decomposition.

We believe the markets are not pricing in this scenario, and when these growth fears emerge, global markets may be choppy, with some of those concerns showing up in India too. To understand the macroeconomic implications of changes in equity risk premium, we have regressed both IIP and GDP on ERP as well as its past values. A distinction is made between increase and decrease in ERP, which are included separately to estimate their asymmetric impact. When premiums increase a foreign investor would evaluate India along with other markets. With the corresponding increase in risk, his or her expectations would increase in terms of the returns and thus would expect equities to be a lot cheaper for generating those additional return.

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• In the last one year, NASDAQ has zoomed 69%, while Dow Jones and S&P 500 have surged in the range of 40-45%.
• No one would be looking at a 10-12% return by buying a lottery ticket for the simple reasons that they are highly risky.
• At the same time, corporate earnings are emerging from a nearly decade-long earnings lull, and markets are confident of strong prospects for equities.

That said a few more weeks like the last two will push the price below my median value, and if it does, I would buy Zomato, as part of a diversified portfolio . This comes days after foreign brokerage Jefferies retained its “buy” rating on the stock with a target price of ₹100. The stock of the food delivery firm made a stellar debut when it got listed on the bourses last year.

The most recent plunge in the stock price seems to have been precipitated by Zomato’s acquisition of Blinkit, a grocery delivery company, for $570 million , on June 24, 2022, and the expiration of the lock-in period, allowing insiders to sell shares in the company. At close of trading on July 26, Zomato’s stock price was at Rs 41.65 per share. You would focus on keeping your money in instruments that offer a guaranteed return that is giving a higher return than earlier.

Understanding Market Risk Premium

When this metric is calculated for each country considering the risk differences for individual countries, it is called country risk premium. Hindalco, Sun Pharma and ITC emerged as the top gainers from the Nifty 50 stocks while Bharti Airtel, Apollo Hospitals and Maruti Suzuki were the top losers. Sales and net profit for FY22 on a consolidated basis were Rs 5,733 crore and Rs 586 crore, respectively.

Reproduction of news articles, photos, videos or any other content in whole or in part in any form or medium without express writtern permission of moneycontrol.com is prohibited. The Blinkit acquisition suggests that Zomato is planning a substantial foray into the grocery delivery business, albeit at the expense of a smaller slice of revenues and a smaller equity risk premium india market share, says Damodaran. Kenneth Arrow is the Joan Kenney Professor of Economics and Professor of Operations Research, emeritus; a CHP/PCOR fellow; and an FSI senior fellow by courtesy. He is the joint winner of the Nobel Memorial Prize in Economics with John Hicks in 1972. To date, he is the youngest person to have received this award, at 51.

How to estimate returns from investments

The company was founded in 2011 and was listed on the stock exchange on 17th September 2020. Since its listing, Happiest Minds has given superlative returns (nearly 172% as of 1st August 2022). Experts say this segment should form a part of the investor’s long-term portfolio. While Covid brought unprecedented challenges, it helped the insurance sector to learn new things.

Ahead of the result of the US Fed’s policy meeting later today, investors traded cautiously during today’s session. However, this 16 per cent dividend-paying stock surged 3.61 per cent to form a triangle breakout. Allowing for the wide ranges of estimates that you can have on the total market for food delivery in India in 2032 and the uncertainties about Zomato’s share of that market and its operating margins, you get a range of values. The median value of Rs 34.12 is close to the base case value of Rs 35.32, not surprising since the input distributions were centered on my base case input values, and at its current stock price (Rs 41.65 on July 26), the stock is still at the 70th percentile.

According to him, there are two things that stand out about equity markets in 2022. “Investors are expecting inflation to peak over the next year and subside in the long term, close to the levels that we saw in the last decade. That may be hopeful thinking,” he wrote in a recent post in his blog ‘Musings on Markets’. The burgeoning optimism for the Indian stock market is also reflected in the rapid decline in the equity risk premia for India.

Risk aversion amongst investors varies with age, i.e., older investors are more risk averse and, therefore, demand higher premium compared to the younger investors. This risk aversion increases if investors value current consumption more than future consumption and vice versa. Since risk aversion varies across individual investors, it is the collective risk aversion, which determines the movement in equity risk premium.

In this post, I will begin with a quick review of my 2021 valuation, then move on to the price action in 2021 and 2022 and then update my valuation to reflect the company’s current numbers. If you do not receive your return on that, it means the country’s economy has collapsed. The actual rate of return on the bond may vary based on the market trend. Inflation is a crucial influencer to that rate of return, but that is the rate you will get as long as the government exists. Two, as the graph below will tell you, the small-cap index struggled to deliver in the last 3 years had you invested anytime from 2016 (rolling 3-year returns from 2019).

EQUITY RISK PREMIUM

Save taxes with ClearTax by investing in tax saving mutual funds online. Our experts suggest the best funds and you can get high returns by investing directly or through SIP. The MSCI India index—a benchmark for global fund managers to assess the country’s investment performance—now has a valuation premium of 96% and 39% over the MSCI Emerging Markets and the MSCI World indices, respectively. Over the long term, India has traded at 45% and 8% premium to the EM and DM markets. As India continues to persist as the fastest-growing economy, it is going to be a golden period for equity investors.

An illiquid market means that the transaction cost of liquidating positions will be higher, making investors demand higher ERP. A study on the US stock returns between 1973 to 1997 concluded that liquidity accounts for a significant component of the overall ERP, and that its effect varies over time . Another research showed that liquidity across the markets can partially explain the differences in equity returns and risk premiums across emerging markets . ERP is conceptualised as the excess return that makes an investor indifferent between holding a risk-free investment, usually a government bond, and a risky equity investment.

Conversely, when markets have rallied, ERP reduces simply because the growth potential reduces. This book aims to create a strong understanding of the empirical basis for the equity risk premium. The equity risk premium is an estimation of excess return one can earn by investing in stock market over a risk-free instrument, such as government securities. It is calculated by using various quality and quantitative factors to arrive at the premium.

I do not see a major recovery in earnings in the medium term,” said Saurabh Mukherjea, Founder, Marcellus Investment Managers. Note that my core story for the company has not changed, but its Blinkit acquisition suggests that Zomato is planning a substantial foray into the grocery delivery business , albeit at the expense of a smaller slice of revenues and a smaller market share. The value per share has dropped from Rs 40.79 to Rs 35.32 per share, with much of the value change from last year is coming from macroeconomic developments, manifested in a higher cost of capital. For this value to be generated, the company will need to stop paying lip service to contribution margins and adjusted EBITDA, and work on reducing growth in its cost of goods sold. That opening day glow lasted for the rest of 2021, abetted by easy access to risk capital, and the stock maintained its lofty pricing.

Handbook of the Equity Risk Premium (Handbooks in Finance) Hardcover – Import, 5 December 2007

Terminal growth rate is assumed to be equivalent to 10-year G-sec rate, which is also considered to be the risk-free rate. In this equation, n represents the number of years of high growth, P0 is the current equity price, FCFEt is the expected free cash flow to equity in period t, ke is the cost of equity or expected return on equity and gn is the long-term stable growth rate. The second wave of covid-19 caused more infections and deaths than the first, but was short-lived, and with the healthcare system better geared up than last year, lockdowns were less intense too. Not only did this mean less economic loss, it also meant less uncertainty for markets. During the year, financial results of listed companies also turned out to be better than feared, driving significant upgrades to earnings estimates for FY23—a rare occurrence, given that over the past decade, earnings estimates have tended to get revised down. Due to this optimism and strong inflows from domestic savers into equity markets, by the middle of the year, price-to-earnings multiples for the market had risen to very high levels, and the premium to global markets had also reached decadal highs.

Though we have filed complaint with police for the safety of your money we request you to not fall prey to such fraudsters. You can check about our products and services by visiting our website You can also write to us at , to know more about products and services. Just write the bank account number and sign in the application form to authorise your bank to make payment in case of allotment. Investors can compare rates on conventional Treasuries to Treasury-Inflation Protected Securities to get a sense of where inflation goes from here. There’s a handy dashboard put together by Jeremy Schwartz at WisdomTree that illustrates well how positive the outlook is for owning boring old Treasury bills, notes, and bonds. Satya Sontanam is a senior content creator at Mint with a keen interest on data crunching, analysis and the story behind trends.

As the pace of earnings upgrades slowed, high energy costs became headwinds to India’s economic recovery, and expectations of a taper hurt other emerging markets, driving foreign investor outflows from India too. Equity prices rebounded sharply during this period and the results of DDM illustrates the positive impact of ERP and earnings expectations. During this period, ERP fell sharply from peak of 8.2 per https://1investing.in/ cent during crisis period to average of 4.8 per cent during this period. This can be attributed to the revival of risk sentiment due to both monetary and fiscal support in the aftermath of crisis. Further, Indian economy weathered financial crisis relatively well which meant outlook on earnings growth also recovered quickly. One important risk, which arises from investment in equity is the liquidity risk.

For context, the same stood at a negative 2% during the technology bubble in the late 1990s and early 2000s. “So, clearly, at a plus 2.9%, we are still lightyears away from that, which was a real bubble,” Brett Nelson said. The Rserve Bank study further found that equity prices during 2016 and early 2020 rose due to a decline in interest rates and equity risk premium.