The Indian stock market is poised for ‘outsized’ returns if the yield on the trailing 12-month Nifty earnings over the 10-year government bond yield is anything to go by. The trailing 12-month Nifty earnings yield has turned higher than the government bond yield for the first time since 2009 by 10 basis points, said Spark Capital.

There have been only two such instances in the past, during financial year 2002-03 and during financial year 2008-09 — and both instances have been followed by outsized returns, the brokerage said. This is because the low growth-low bond yield environment creates the needed supply side triggers for growth to revive, the brokerage said. “When earnings yield is higher than bond yield, it implies investors are unwilling to pay any growth premium as the street believes that the earnings growth outlook is structurally impaired,” the brokerage said.

Autos, banks, consumer durables, capital goods and metals have consistently outperformed during the recovery phases of the market whereas the telecom, utilities, FMCG and oil and gas sectors have been the laggards, the brokerage said. Currently, the index is down over 30% from record highs hit in January as the coronavirus outbreak has cast uncertainty over the economic growth outlook, with confirmed cases continuing to rise in India. Whenever the yield on trailing 12-month earnings has been more than that specific day’s bond yield, the average returns on the Nifty over the onemonth, three-month, sixmonth, 12-month and two-year horizons have been positive to outsized, said Spark Capital. “Even the minimum returns have been over 43% in 24-months whenever bond yield and earnings yield differential turned negative in the last 20 years,” said Spark.