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Where Is the Sensex Headed Next?

Jan 20, 2016

In this issue:
» Digital medium fast gaining popularity
» Corporate deposits seem to be rising
» ...and more!
00:00
Radhika Pandit, Managing Editor of ValuePro

My family, friends, and relatives are greatly interested in what I do. After all, I work in an equity research firm. So everyone wants to know where the Sensex is headed next and if I have 'tip' for them.

Today, I will focus on the first question. Honestly, I don't know where the Sensex is headed. This usually shocks whoever hears it. How can I be in the thick of the action and not know where the Sensex is headed?

To me, the real question is: Is where the index goes next even important? It's not a question most analysts consider, especially those who make it their business to attempt such forecasts. At Equitymaster, my colleagues and I have never attempted to predict the direction of the markets.

How accurate are these other analysts' forecasts anyway? Now, here is where things get really interesting. I came across an article on SafeHaven that highlights the research of Mr Salil Mehta, a business statistics professor at Georgetown University. The professor has tried to analyse how optimistic Wall Street forecasts typically tend to be.

Mehta collected 186 public forecasts from 1998-2015 by big investments banks and equity firms. The results are displayed in the table below:

S&P 500: Predicted gains Vs Actual gains
Date Predicted gain (%) Actual gain (%)
2001 28.56 -13.03
2002 11.28 -23.34
2003 15.81 26.36
2004 1.92 8.99
2005 3.69 2.97
2006 9.93 13.62
2007 7.11 3.53
2008 11.75 -38.49
2009 15.77 23.48
2010 11.09 12.83
2011 9.16 0.0
2012 7.73 13.35
2013 9.57 29.59
2014 7.00 11.42
2015 7.26 -0.73

Data Source: SafeHaven

As you can see, most of the time, the forecasts were way off mark. But what really catches your attention is that the analysts and forecasters predicted the S&P 500 to rise each and every year. Nobody forecasted a decline...when the reality is that the S&P 500 fell four times in the last fifteen years.

We have not done a similar analysis for the Sensex. But if we had, we wouldn't be surprised if the result were not much different.

What does all of this mean? Forecasting the benchmark index level is simply a futile exercise. Not just that, even trying to determine stock returns based on macro forecasts is not of any help.

We live in a world where the global financial markets are very closely linked. And there are just too many factors at play both at the international and domestic levels. What will impact the markets ultimately, therefore, is a tough call to take. In other words, this kind of forecasting is highly uncertain and totally unpredictable.

So how does one make sense of this and still be a successful investor? By sticking to a well-defined process. This means you invest in a business for the long haul. You also select companies with robust business models, sound management, and healthy financials. This should never change, no matter the environment.

In fact, if you have identified a good business, then volatile times of the kind we are seeing now will actually give you a better opportunity of buying it at the right price. And that's what good investing is all about.

Do you think that predicting Sensex levels is the key to success in investing? Let us know your comments or share your views in the Equitymaster Club.


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03:03 Chart of the day

Digital media is increasingly becoming an integral part of the lives of Indians. Social networking, online shopping, gaming, entertainment and scores of useful applications on the digital media are slowly gaining centre stage. The government has also launched its Digital India programme to bring the digital revolution to the masses and empower them. These include a host of schemes such as Digital locker, e-education, e-health, e-sign and national scholarship portal. Therefore, the digital medium is slowly becoming the preferred medium for advertising as per a report by media agency GroupM.

The report states that the advertisement spends on the digital medium will continue to grow the fastest in 2016. Recording superlative growth of over 47%, the share of digital advertisement in overall ad spends is expected to increase from 9.9% in 2015 to 12.7% in 2016. This shift will be at the expense of the print media whose share in ad spends will shrink from 32.4% to 29.7% over the same period. However, television is expected to hold its dominance and increase its share to 47.1% in 2016. The overall ad spends in India are expected to grow by 15.5% in 2016 with all traditional media platforms, barring magazines, witnessing growth.

Digital medium fast gaining popularity

04:01

Earnings growth for India Inc continues to remain tepid. But finally there may some reason to cheer. There has been a rise in the share of corporate deposits that points to an improvement in the funds position of the corporate sector. The share of corporate deposits in total bank deposits had been falling since FY10. After declining from 14.8% in FY10 to 9.9% in FY14, the share of corporate deposits rose for the first time to 10.1% in FY15. This shows that Indian companies may have actually started to generate cash. This is further corroborated by the fact that current deposits recorded the fastest growth of 15% in FY15 even as savings deposits and term deposits grew by 8% and 11%, respectively for the year. While this may be an early sign of better times for the corporate sector, a more sustained recovery is likely only on an improvement in overall demand.

4:45

Indian equity markets largely languished in the red today as selling activity persisted across index heavyweights. At the time of writing, BSE Sensex was trading lower by 576 points and NSE-Nifty was trading down by 175 points. Mid cap and small cap stocks were not spared either and were trading lower by 3% each.

04:55 Today's investment mantra

"Wide diversification is only required when investors do not understand what they are doing." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Radhika Pandit (Research Analyst) and Madhu Gupta (Research Analyst).

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3 Responses to "Where Is the Sensex Headed Next?"

Suresh P. Vasudevan

Jan 22, 2016

Nice attempt, Radhika, for this 5 minute wrap... As per my reading, Sensex, and, by extension, Nifty actually fluctuates on three principle pivots. And none of them are based on any World wide Equity markers... Recession, New Law/s, World wide meltdown, political stability / instability, etc. has only a very minuscule, and short term, effect on them.

Like 

Manish

Jan 21, 2016

Very good article. Am from the SCM consulting domain wherein we try and predict the demand patterns... and never ever get it right...!!! this is similar...

Like 

Daljeet Singh

Jan 21, 2016

Interesting perspective and yet hordes of investors just do that; follow the index! I have been watching the indices since 1993 and absolutely agree with the view. One suggestion: It would be good to know over what period the gains/losses are calculated in the second column of the table in your article

Regards,
Daljeet

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