A study by Credit Suisse says Generation Z investors may not be as lucky as those in the previous generations.
A study conducted by Credit Suisse as part of its 15th edition of Global Investment Returns Yearbook is making the case that future generation of investors, i.e. Generation Z, may not be as lucky as previous generations in terms of real investment gains (returns after adjusting for inflation). Generation Z, or Gen Z, refers to people born between 1997 and 2012.
The study, which analysed data since 1900, was taken up in collaboration with professor Paul Marsh and Mike Staunton of London Business School and professor Elroy Dimson of Cambridge University.
Mint spoke to a few Indian investors across the four generations—baby boomers (born between 1946 and 1964), Generation X (born between 1965 to 1980), millennials (born between 1981 and 1996), and Generation Z.
Baby boomers
Credit Suisse’s yearbook2023 says that baby boomers enjoyed the best investment returns, in terms of global averages, with annualized real equity returns at 6.7% (see graphic).
What helped Indian baby boomers was a strong initial public offering (IPO) market. Several companies that later became large business groups and conglomerates floated their IPOs back in the day.
Ramesh Bharwani, 69, recalls investing in the IPOs of HDFC Bank and Housing Development Finance Corporation (HDFC) and making huge gains from these investments. This includes dividends and bonus shares offered over the last 30 years. Later, he bought shares of companies such as Infosys and Wipro from the markets and made robust gains.
Several of the companies that were listed in the 1980s and 1990s are blue chips today. Bharwani says that was the period when you could just buy shares and forget about them, without having to worry about day-to-day price movements.
Other baby boomers also agree that the IPO market delivered robust returns over the years.
Generation X
Swarup Mohanty, chief executive officer (CEO) of Mirae MF, born in 1970, says Generation X, of which he is a part of, was quite confused and had a lot of insecurities. The 1970s was quite a difficult one for India, with economic growth at just a little over 2%. The 1980s saw improved growth, with reforms and external borrowings, but new challenges rose towards the end of that decade due to a crash in oil prices and a global recession, which contributed to India’s balance of payment crisis.
Mohanty started investing at the age of around 26, by which time the Indian economy had opened up following the liberalization reforms initiated in 1991. Mohanty recalls that fixed income returns were quite robust then. “We could get 16-17% returns on fixed deposits of non-bank financial companies (NBFCs)”.
The Credit Suisse study also shows a rising trend in returns on bonds: from 2.9% for baby boomers to 4% during the time of Generation X.
Mohanty dabbled a bit in direct equity but stopped when he could not make gains on these investments. Gradually, he shifted to mutual funds (MFs) and has since been a MF investor. But, he says, the returns have diminished over time.
“Earlier, one could say that equity MFs could offer 15-20% returns over time but the average equity returns have gradually come off over time,” Mohanty says. He remains a slightly aggressive investor, follows the age+15 formula for his equity allocation and the rest for debt. So, at 53, Mohanty now has around 70% allocation to equity.
Millennials
Credit Suisse’s analysis shows that bond returns had further improved for millennials. From 4% for Generation X, to 4.2% for millennials. But, equity returns continued to slide, from 5.2% for Generation X to 4% for millennials. However, some millennials have been more willing to take risks than previous generations to get better investment returns.
For example, Karan Baweja, 38, founder and CEO of edtech startup Upsurge, invests in direct equity, startups, and cryptos, apart from investments in equity MFs. He has also added foreign securities to his portfolio through MFs.
Ayush Agarwal, 36, who works in the fintech sector, takes calculated risks with his investments. He invests in MFs but has also built a stock portfolio over the years.
Agarwal has tried to diversify his portfolio across asset classes by adding debt and gold through asset allocation funds, as well as taken exposure to foreign securities through diversified funds and index-tracking funds.
Both Agarwal and Baweja have investments in mid- and small-cap stocks, where the risks are high but the potential for better returns is immense.
Yet, the question is how many millennials can today afford to take higher risks and have the wherewithal to carry out research before making direct investments in equities or in alternatives like startup investing and cryptos.
For example, Baweja has worked in the investment banking industry and knows how to analyse companies. Agarwal is pursuing his certified financial analyst (CFA) charter as well as an MBA in finance.
For previous generations, equity markets were still under-researched when it came to listed companies, but today most large-cap companies, and even mid-caps to a large extent, are tracked by several sell-side analysts. Generating outperformance has become challenging and only a few investors are able to get superior returns.
What does it mean for Gen Z?
Tomorrow’s investors may or may not have the same investment experience that previous generations had, according to Credit Suisse’s yearbook.
Ashish Sharma, 25, a chartered accountant, who has just started working in the financial services space, says he expects 15-20% annualised returns from his long-term investments. “I think such returns should be sustainable over the long-term,” he points out.
Sharma has divided his equity portfolio in two parts. In one part, he invests in stocks with a long-term horizon of 10-20 years and, in the other, takes swing trades on stocks. Swing trading refers to buying and holding a stock for a few weeks to six months to make quick gains. Sharma also actively trades in the high-risk futures and options (F&O) segment. He has some investment in equity linked savings schemes (ELSS) of MFs for tax-saving purpose.
Sharma says he did his homework before entering F&O. “I have learnt a bit about options Greeks, as well as the Black-Scholes pricing model.”
He says that he understands the risks, but says even if he incurs some losses, it would teach him new investing lessons.
Shritej Zemase, 25, who is currently a student at National Institute of Securities Markets (NISM), says he would be more than happy if he can get more than 15% annualised returns over the long-term from his equity investments,” he says.
In response to Mint’s query on the bleak forecast for Generation Z, the authors say that previous generation’s investors have been exceptionally lucky.
“In 1950, investors would have looked back to the previous half century when the annualized real return on the world index was just 3%. Only a rampant optimist would have believed that over the next 50 years, the annualized return would be 9%. Yet, the second half of the 20th century was a period when many events turned out better than expected. There was no third world war, the Cuban Missile crisis was defused, the Berlin Wall fell, the Cold War ended, productivity and efficiency accelerated. Technology progressed and governance became stockholder-driven,” says Marsh.
“The prospective returns for baby boomers may well have looked like the returns we are today projecting for Generation Z. But things turned out much better than expected and shareholders enjoyed windfall gains. Similarly, bondholders made windfall gains during the ‘golden age of bonds’ from 1982—the equity-like returns were much higher than what would reasonably have been projected. So, on this view, the baby boomers, Generation X, and millennials were lucky generations. Our projections for Generation Z are simply based on what seems most likely. They are mid-point projections that assume Gen Z will be neither especially lucky nor unlucky,” he adds.
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