Sensex at 1 lakh is quite likely says Karvy’s recent l wealth report.
In a press conference to unveil the report, Abhijit Bhave, CEO Karvy Private Wealth urged that people should not focus on the short-term ‘E’ – ‘elections, instead, they should focus on the long-term ‘Es’ which are economy and earnings. “Direct equity has emerged as the preferred asset class in FY18. The volatility in world markets and the Indian market has been noteworthy of late but India still stands tall and has reclaimed ‘the world’s fastest growth large-developing economy tag from China. We foresee that the coming five to seven years will be the time for equity as an asset class and investors can possibly treble their wealth in equities”, he added.
The report cites two key factors, which will contribute towards the growth in equities.
- Fundamentals: Economy and earnings
India’s internal consumption story will be a key driver for earnings. The report shares that India’s young population will drive internal consumption demand. Both the consumer and manufacturing sector will benefit from this increased demand. The manufacturing sector will also gain from increased capacity utilisation due to strong demand.
Moreover, the pressure on financial sector is also easing due to bankruptcy code and implementation of NCLT process. They also expect sound credit offtake as the demand increases.
The report mentions that there is a strong case of high earnings growth upwards of 18-20 % in the coming years. Between CY 03 to CY 07 Sensex jumped six times with EPS growth was 27%. With higher growth rates expected in the next 7 years, there seems to be a high probability of Sensex trebling from the present levels.
- PE Rerating
The Indian economy stands out among world economies because of strong internal consumption, which largely insulates it from global problems. Moreover, strong domestic inflows have acted as a cushion against foreign investor exit. This increased liquidity builds foreign investor confidence. As markets mature further, the increased liquidity will result in Price to Earnings rerating for investors looking to invest in India, says the report.
Moreover, the higher GDP growth rate will help in broader development of the economy. According to the report, markets are expected to trade at an average multiple of 23 times forward earnings by 2025.
Sharing historical data, the report observes that the Sensex returns from 2002 till 2018 have been 15.30% CAGR. But within that period, Sensex delivered 43.07% CAGR from 2003 to 2007 and 4.93% from 2009 to 2013. Moreover, Sensex returns from 2009 to 2018 have been 8.53% CAGR. Thus, the report concludes that markets are yet to witness a sustained bull run to catch up with average returns for a decade now. With growth expected to accelerate in coming years, they expect equity market returns to move towards long-term average. Additionally, for equity markets to treble until 2025, average CAGR of 15.62% is required. This is only slightly above the long-term average. However, as per mean reversion the CAGR for Sensex will have to be much higher than 15.62% as it moves towards long –term average.
The report concludes by saying that both statistics and economics point towards a sustained bull run.
