Sensex 100,000 is the Story of a Billion Dreams

Apr 2, 2018

Ankit Shah, Research analyst

I just arrived...

After spending over four months in the quiet countryside near Pondicherry, I'm finally back in this megalopolis called Mumbai.

I find these starkly contrasting experiences quite enriching from an equity research perspective. They offer me a holistic perspective of the Indian economy.

Living in Mumbai is like living inside a stock exchange. So much rush and chaos. I hardly ever stop to have random conversations. Much of my time is spent in front of the computer screen.

On the other hand, living in the countryside is like watching the real heartland of India... the ground economic realities beyond the computer screens... the stories behind the numbers in Excel sheets.

If you meet real people - entrepreneurs, businessmen, workers, and students - you will see the economy very differently.

For instance, I met a 23-year old mass media student who was simultaneously also managing a farm and a small restaurant along with her mother. From my several conversations with her, I was deeply inspired by her entrepreneurial zeal and management skills.

In my neighbourhood, I met a Harvard graduate who gave up a successful career as a management consultant in the US to build his own start-up in the field of education.

One migrant worker from Nepal, Ram, does three jobs a day. He works at one cafe from morning to afternoon. Then he switches to a vegan restaurant in the evening. And then he spends the night as a security guard.

Besides inspiring success stories, I also saw how challenging it is to run a small business in the informal sector, to find skilled and motivated workers, to achieve scale and profitability.

From many such stories and conversations, I saw, more and more, how the real Indian economy, the land of paradoxes, functioned.

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It may sound unusual coming from an analyst, but I admit that the Indian economy cannot be captured in Excel sheets. The growth story of India is the aggregate of all the personal journeys and interactions of its billion-plus people.

You may be wondering why I am talking about these things. It's a different narrative than the typical stocks-focused editorial you are used to reading.

I have my little mission here. You see, I strongly believe that stocks can be immense wealth-creators if you take a seriously long-term view. In fact, that's the reason why my research team has been drawing your attention to Sensex 100,000.

In one of my editorials last month, I showed you how 200 years of stock market data proves that equities are one of the most rewarding and safe asset classes over the long run.

But it's difficult to take a very long-term call if you are too glued to the stock markets. Because then you tend to see a stock as just a price ticker, and companies as just numbers.

But when you invest really long-term, you're making a bet on the dreams and aspirations of an entire generation... you're betting on ideas and entrepreneurs. The real economy requires time and patience, which is often at loggerheads with the anxious swings of Mr Market.

It's important to remember this difference.

Because there are times when the mood of Mr Market tends to be so optimistic that many start believing it reflects the new, vibrant, fast-growth economy.

And then there are times when the mood of Mr Market swings to the other extreme. And many market participants become willing to believe that this country is a hopeless wreck mired in corruption, scandals, and inefficiencies.

This happens when you see the world largely through the sensational, bipolar lens of the news media.

But like I just explained, real life economics unfolds in a different way, at a different pace. And to be a truly successful long-term investor, you need to look at the ground economic realities beyond the near-term news and numbers.

At Equitymaster, we have learnt through more than two decades of experience how never to take too extreme a stand on the Indian growth story.

Get overly optimistic and you will get punished (the ongoing market correction is proof). But at the same time, if you get too pessimistic, you will miss out one of the most promising wealth-creating opportunities.

Since several months, our research team has been consistently warning about the expensive valuations in the Indian stock markets. For a while, it almost seemed like we were out of sync with the new stock market realities.

But we were proven right, yet again.

Chart of the Day

From its all-time high level, the BSE Sensex is down about 9%. That doesn't sound like a very major correction. But is it a fair representative of the overall market correction?

To find out, I took a larger sample set - the BSE 500 index.

The aggregate market capitalisation of the BSE 500 index companies is equal to 89% of the aggregate market capitalisation of all the listed companies on the BSE. So, it captures the trend in the overall market quite accurately.

Look at this chart...

59% of BSE 500 Stocks Have Corrected More Than 20%!

The chart above shows the degree of correction in the BSE 500 index companies from their respective 52-week highs.

I had some interesting findings...

  • The correction in the broader market has been steeper than the BSE Sensex.
  • The average mean correction of the BSE 500 index companies from their 52-week highs is over 24%.
  • The median correction level is over 22%.
  • 59% of the BSE 500 index companies have corrected more than 20%.
  • Not a single company in the BSE 500 index was trading at its 52-week high.

Now, I don't know how deeper and prolonged this market correction will be. Honestly, we see it as an opportunity rather than a concern. Our vision is set on taking advantage of any value buying opportunities that the correction could throw up to ride the long-term India growth story. So, watch out the moves of our research team closely.


Ankit Shah
Ankit Shah (Research Analyst)
Editor, Equitymaster Insider

PS: Sensex 100,000 will have lots of winning stocks. Some may already be in your portfolio. Some may be on your watchlist. And this service will help you figure out the rest. Read on to find out more...

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