It took six years for Sensex to double, i.e. from 25,000 points to 50,000 points, when do you see it hitting 1 lakh points?
While the Sensex has doubled in the last 6 years, bulk of the gains (over 90% of it) have come in the last 9-10 months (since March lows). That’s the hallmark of equity markets – while longer term holding is rewarding, near term movements are almost impossible to predict, let alone timing them effectively.
Assuming, close to double digit nominal GDP growth for India in foreseeable future and an unchanged market cap to GDP ratio, Sensex should take 7 years to double from here. However, there have been 2 key assumptions here – 10% nominal GDP growth rate and no change in market cap to GDP ratio. Changes in these to variables can shorten or lengthen this period.
On a depressed GDP number of FY21, the next year will benefit both from poor base and strong recovery. Market cap to GDP is a valuation metric, which would depend upon the continuation of money printing, low interest rates and buoyancy of the equity markets worldwide.
RBI governor once again said that the stock markets have a major disconnect with the real economy. What is your take on this?
The divergence between economic reality and stock market strength has been the most critical paradox discussed over the last few months. While I would agree with RBI governor on this disconnect, I would also look at few of the finer points.
We all know that over longer term, equity markets are a reflection of the economy. In the last 40 years, Sensex is up ~500x at a CAGR of ~17%. During the same period, India’s nominal GDP has grown at a CAGR of ~13%. Hence, the long term return on Sensex was close to nominal GDP growth.
During 2010 to 2019, Sensex was up 2x (CAGR of 8%), while nominal GDP was growing at low double digits. Hence, some divergence between economy and markets was already being built in over the last decade. After the big run up in equity markets last year, the 10-year CAGR on Sensex and nominal GDP both stand at ~11% now.
May be, the current dichotomy between economy and markets is a correction of the past.
Apart from above, the fact that there is unprecedented money supply/printing and near zero interest rates, the values of risk assets are bound to be high. Valuations, a much spoken topic, can remain higher as long as money printing and low interest rates continue.
How are you feeling about Sensex reaching 50,000? What will change from here?
Being a long term investor in markets, it’s definitely a moment to cheer to see Sensex scaling new peaks, now at 50k. As the same time, we are cognizant of the fact that, Sensex EPS has remained flattish for over 5 years now. Earlier we had troubles from NPAs then we had covid. All eyes would now be on earnings growth, especially when valuations have not left too much room for error.
India is a long term growth story and our fundamentals remain intact. Good and efficient companies with strong balance sheets, steady earnings growth and investor friendly practices would likely continue to be favourites amongst investors.
While demographic benefits have been there for quite some time, active covid cases in India are now 80% below peak seen in September last year and we are also staring at a plethora of opportunities from manufacturing shift out of China to other countries including India. We are poised to do well. Possibly, FIIs are also seeing this, when they poured in $23bn in India last year, while almost every other EM country saw an outflow.
