Sensex at 30,000 in six years?

The Bombay Sensex, comprising the 30 top companies on the stock market, hit a historic high of 14,000 last week, up from less than 9.000 at the start of the year. This was a huge achievement. But the market mood was subdued, and people did not open bottles of champagne.

Many feared that the stock market was overvalued, and due for a fall. Everybody remembered the euphoria when the Sensex roared upward in the first four months of this year, only to crash precipitously to 8,999 in June. Short-term investors and day traders took a real beating, and worry that it will happen again.

The market boom has been concentrated in a few big stocks. Many small and mid-cap stocks trade at far lower prices than in April. Small investors, who often buy such stocks, are still licking their wounds.

A flood of dollars from foreign institutional investors (FIIs) has sent the market soaring. But the same FIIs sang a different tune when the market crashed in May-June, with some declaring that a fair Sensex level was 7,500-8,000. Clearly foreign investors (and markets) are creatures of moods.

Nobody should think that the Sensex is up simply because India’s GDP has accelerated to 9 % in the first half of the year. Global liquidity is flooding all emerging markets from Korea to Thailand to India, from Egypt to Brazil to Venezuela. India is no more than part of the global story. But the global tide can ebb (as it did in May-June) as suddenly as it has risen. Many possible events—rising interest rates, a falling dollar, or a hard landing for the US economy –could lead all markets to fall. A single terrorist attack in the USA could cause a flight of funds to safe havens—which means out of India.

Ruchir Sharma of Morgan Stanley has argued in The Economic Times that there has been a sustained fall in global inflation, with even inflation-prone countries like Brazil conquering the beast. India’s inflation rate is down from 8-9% to around 5% per year, and should (other things equal) translate into sustainably higher stockmarket prices. That is a very rational argument for long-term bullishness. But in the short run, markets can remain irrational for longer than you can remain solvent.

Don’t be a sucker who enters the market at the top of a boom, and then sells in panic when the market drops. Forget thoughts of making a quick buck on the stock market.

But India looks an excellent long-term bet. I am willing to stick my neck out and say that you can’t go wrong betting on India in the long run.

India has averaged 9% GDP growth in the last six months, but that looks unsustainable, since it has been aided by exceptionally favourable global conditions, which may not last. Assuming sustainable GDP growth at 7.5% and inflation at 5 %, nominal GDP should rise 12.5% per year. The profits of top companies should rise at least one and a half times as fast, which means around 18%. If the Sensex simply keeps pace—if it too rises at 18% a year—it will hit 30,000 in six years. That is the simple logic of compound interest.

Is a sustained rise of 18% in profits unrealistic? No. Profit growth has been much higher in the last few years. Many software companies and banks have reported profit growth of 30%, and infrastructure and real estate companies have in some cases doubled profits.

On the other hand, as I’ve already said, several things could go wrong in the short run. Massive global liquidity injected by the US trade deficit into the world economy has lifted all boats, with even Africa growing at 5.5% a year. At the same inflation is under control because of the cheap production of manufactures by China and services by India. Interest rates have been checked by a massive rise in savings in Asia.

Such a happy state of affairs cannot continue forever. Something will give. The housing market in the US could crash, leading to a chain-reaction of recessions in countries exporting to the US. The greatest threat of all is renewed terrorist attacks on the US. It is only a matter of time before suicide bombers, so common in the Middle East, detonate themselves in the US rather than in Palestine or Iraq.

So the path of the world economy and stock markets could be a roller coaster, with wild upsurges followed by stomach-churning falls. Not all investors have the stomach to ride a roller coaster. But if you have faith in India’s future, then you should close your eyes and sign up for the ride.

Given short-term uncertainties, I have no idea where the Sensex will be six months hence: it could be up or down. But six years from now, I would expect to see the Sensex touch at least 30,000. Sounds good, doesn’t it?

One thought on “Sensex at 30,000 in six years?

  • 2012.Sep.24 at 10:45
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    hello sir, i read your article now.. its very well informed..
    thanks.. i am investing my money on equity based S.I.P.(systematic investment plan.) for next 10 years and 10000 per month.. should i be optimistic for better return??

    Reply

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