Equities continue to appear less attractive than bonds
However, market experts believe that an imminent improvement in the earnings cycle in the next two quarters and a further reduction in the benchmark interest rates may change the situation in the coming months.
Based on the expected earnings of the Sensex companies for 2013-14, the earnings yield — calculated by dividing the earnings per share by the index\'s current value — at 7.4%, still maintains a discount to 10-year bond yield, which is close to 7.8%.
At the current levels, while the bond yields are in line with their long-term averages, the earnings yield is trading a tad above its average value of 7.25% of the last seven years.
“As interest rates are cut, this equation would change. Further, retail participation in equities, which has remained muted with consistent redemptions in 2012, may also get a boost from the government\'s additional measures. Both these developments would play out post-Budget, resulting in a reversal in this trend,” said Rakesh Arora, managing director and head of research, Macquarie Capital Securities.
Generally, the asset allocation between equity and bonds is based on how earnings yield compete against that of the benchmark bonds.
In early 2003-2005 and late 2008, a higher earnings yield was followed by a strong rally in the equities. Interestingly, for most part of the last three
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