Anybody for Sensex 27,50,000 by 2042? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Anybody for Sensex 27,50,000 by 2042? 

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In this issue:
» Has inflation bottomed out?
» Does the government have enough room to boost growth?
» Nassim Nicholas Taleb's views on economic growth
» ...and more!


00:00
Readers of the 5 Minute WrapUp would be aware of the term 'Multibagger'. It was coined by legendary mutual fund manager Peter Lynch of Fidelity. It simply means a stock which has risen in price many fold over the years. But the term is not restricted to stocks alone. It can be applied to any financial asset. So why should we ignore the BSE Sensex itself when thinking about multibaggers? After all, it is an important economic barometer. If India's benchmark stock index has the potential to be a multibagger, then surely there will be several good stocks to choose from.

In the case of India, the past provides us some insights about this possibility. The BSE Sensex was created with a base of 100 in the year 1979. As per an article in the Economic Times, the Sensex became a '100 bagger' in February 2006 when it hit 10,000 for the first time. That is a CAGR of almost 19% over a 27 year period! Quite impressive don't you think? Also, do keep in mind that up until 1991, there were no economic reforms to help corporate profits. Despite this, the market as a whole, delivered a superb performance.

Let us fast forward to the present. The Sensex is trading at 27,500 odd levels. How many years do you think before we see the Sensex at 27,50,000? Or does this level seem impossible to you? Well, it doesn't seem impossible to us! In the long term, there is a direct relationship between corporate profits and share prices. Thus, if earnings were to grow at about 19% CAGR from here on, there is no reason why the next 27 years cannot be similar to the first. What is the basis of our belief in earnings growth? The one word answer: reforms. A lot of them.

You see in a country like India, the government has played a poor role is fostering economic growth. Indeed, it can be said that India's economy grows despite the government, rather than because of it. The big exception of course, was 1991. When the flood gates of liberalisation were opened that year, the economy entered a whole new orbit and corporate profits zoomed. We have had about 24 years of incremental reforms since then. Despite a few setbacks, the fruits of the 1991 reforms are there for all to see. This is why we believe, the government should become a more proactive player in the economy. As the economy opens up further, Indian corporates will be become more competitive and thus more profitable. As profits are ploughed back, the economic boom will get stronger. In such a scenario of strong corporate profitability, a Sensex level of 27,50,000 by 2042 is not at all impossible.

We believe the markets have already realised this. These days, every brokerage seems to come out with reports of future multibaggers! And why not? When the benchmark index itself is a potential 100 bagger, there are innumerable opportunities in individual stocks.

However, this is no reason to go overboard and get carried away. Finding multibaggers is no easy task. We believe it is possible to find multibagger stocks, with or without the aid of reforms from the government. The BSE Sensex may reach 27,50,000 by 2042 or sooner. Or it may not. Retail investors though, will be best served by following a bottom-up approach to stock picking.

Do you believe the Sensex can be a 100 bagger from these levels? Let us know your comments or share your views in the Equitymaster Club.

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02:05
Nassim Nicholas Taleb is someone whose opinion we value highly. He was one of the few people who predicted the global financial crisis of 2008. His views on events that may adversely impact markets are quite insightful. Thus, when he recently said that decentralisation is a crucial factor for economic stability and growth, we took notice. He did not stop at that. He stressed that centralisation and more government control over economies, as we are seeing now, would stifle growth. While large public projects may produce benefits, they also increase risks in the economy. This is because it increases the risk of the government suffering large losses.

As per him, the best way for an economy to grow would be to encourage decentralisation. Entrepreneurship should be left to the private sector. People should be empowered to take decisions for their benefit rather than having decisions being imposed upon them. An economy governed in a bottom-up manner would be more stable and less prone to risks than an economy governed in a top-down manner. A very interesting thought indeed we believe.

03:35
As far as prudent fiscal policies go, India still has a lot of work to do. In fact, should the world economy suffer from another bout of depression, judging by India's fiscal deficit, it may not be well equipped to deal with it. According to the World Bank's Global Economic Prospects report, only countries with adequate fiscal space can take steps to counter the effects of a recession.

Further, it stated that those countries whose fiscal space has narrowed as a result of stimulus measures taken in the light of the 2008 global crisis need to return their fiscal positions to more sustainable levels. We believe that India is certainly one of them.

Fiscal space can be strengthened in three ways. One is to set ceilings on debt and expenditures. The other is setting aside some funds so that these act as a cushion that can absorb any future shocks. And the third is to have a plan of what kind of expenditure the government intends to incur.

The latter especially is important because productive expenditure is essential and goes a long way in bolstering the growth of an economy. This then has a favourable impact on a country's fiscal balance. And so when there are unprecedented shocks, such as the 2008 global crisis, there is ample fiscal space to undertake stimulus measures if required. In other words, stimulus measures by themselves are quite ineffective. The Western countries have amply demonstrated that.

So what the Modi government needs to do is ensure that if it adopts a expansionary policy to stimulate growth, it does so in such a manner that the fiscal deficit does not get out of control. Quite a tall order in the current circumstances. But something that it will have to emphasize on if India's growth has to remain on track.

04:05   Chart of the day
The CPI inflation for the month rose to 5% for the month of December 2014 after falling for three consecutive months prior to that. It had fallen to a low of 4.38% in November 2014. The rise in December has largely been attributed to higher food prices. The million dollar question, however, is whether the RBI will agree to a rate cut in its next monetary policy. The good thing is that the RBI has maintained an independent stance so far and has not bowed down to the wishes of either the government or corporate India.

Although the CPI for the last four months has been contained within the RBI's comfort limit of 6%, the bigger point is whether this will be sustainable going forward. Because if it is, the central bank may very well cut rates and give that extra push to growth. However, as we have reiterated in the past, the battle to keep inflation under control has to be fought by the RBI in tandem with the government. This means that the Modi government needs to do its bit as well and get the reform process going. This along with a prudent fiscal policy has to complement the RBI's monetary policy so that high inflation does not remain a chronic problem for India.

Is inflation on the rise again?


04:45
In the meanwhile, the Indian markets were trading flat with the BSE-Sensex trading lower by about 15 points at the time of writing. Stocks across the board were trading strong with those from the FMCG and engineering spaces leading the gainers. As for markets in Asia, most ended the day on a strong note. European indices were also trading firm at the time of writing.

04:55  Today's investing mantra
"There are huge advantages for an individual to get into a position where you make a few great investments and just sit back, you're paying less to brokers and you're listening to less nonsense."- Charlie Munger
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7 Responses to "Anybody for Sensex 27,50,000 by 2042?"

NAVEEN KHANNA

Feb 16, 2015

yes i do belive i think we could get even more than 100 times.all we have to do is stay invested never to sell the stocks pass on your legacy as our fore fathers does it in land banks or in gold.the time has changed the best form of investment to day is investing in business or equity.every time i quote the examples of big daddies like wipro,infosys and hero motor corps,itc etc they have delivered and created humongus wealth for their investor.it is true that not every body have these stocks in their portfolio.but no body is having those stocks for so long and this is more important.can anybody tell me one asset class just one,which has delivered such profit (tax free)i have no idea about other asset class like property but tell me just one.HAVE BELIFE YOU WILL SEE THIS LEVEL MUCH BEFORE 28 YEARS

Like 

Pradip

Jan 14, 2015

Sir,

it is not necessary that the past performance will be repeated in future.

What i find is new trend of start up in every field are financed by angel investors. So the benefit goes to angel investors. Take one simple example of Flipcart or Snaldeal. They have not gone to public for financing their business. Their business is growing ( allthough they are incurring losses ) valution is growing but as these are not listed companies they are not contributing to the growth of sensex. These are few example. My guess is that these companies are going o kill a lot of brick and mortar companies which are in the senses.

Like 

KD

Jan 14, 2015

Excellent article. Excellent returns is only possible if you have ability to invest for very long period of time.

Like 

LALIT SHAH

Jan 14, 2015

I AM 65 YEAR OLD MAN WHY SHOULD I THINK OF 2042 ?
SECOND THING U ARE SHOWING SO MANY EXAMPLE THAT SO MANY SMALL MID CAP GIVEN MORE THAN 100 TO THOUSANDS OF PERCENT IN LAST 10 YEARS BUT YOU HAD NOT RECCO THAT STOCK. WHAT U MEAN TO SAY AND CONVEY INVESTOR?

Like 

Ashok Kumar Sethi

Jan 14, 2015

The expectations of Indian Sensex touching 27Lacs 50 thousand in next 28 years might be very lucrative for younger generation of investors. But, one thing crops up in the mind ie; has this happened in any other developing nation? If it is so, then who has to earn the credit? Whether the present Govt. under Modi or the steps taken by UPA Govt?

Like 

Al

Jan 13, 2015

How convenient that you stopped measuring the CAGR in 2006 and came up with a 19% figure. The actual Sensex CAGR since inception in 1979 is actually less than 17% (16.88% to be exact). At that rate the Sensex will grow to only 18,54,890 by 2042, a full one-third less than the 27,50,000 touted in the article. This also demonstrates that a couple of percentage points difference per year can make a huge difference in the long run.

Like (2)

Lalit J Jhaveri

Jan 13, 2015


all 'pipe-dreams' - there'd be humongous geo-political developments all to the detriment of India and BSE; your prediction of BSE touching 27,50,000 by 2042? social disparities further widening, more political upheavals, humongous disturbances on all fronts; possibly, IteS and IT could do well, but no innovation from Indians, only commoditisation of work devoid of creativity; however, India's best HR on planet but I ain't too optimistic; God bless us all,

Like (2)
  
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