Which is the next Sensex level being predicted?

Jul 8, 2014

In this issue:
» Sensex has gained the most in 1st half of 2014
» No connect between economy and stocks in the US
» ECB to use Euro as weapon to drive growth?
» BRICS is setting up a fund
» ...and more!

In the first 6 months of 2014, the BSE-Sensex gained close to 5,000 points to reach 26,000 levels. As hopes of Mr Modi performing miracles for the Indian economy gained ground, money started flowing into Indian stock markets. So how easy will it be for the Sensex to gain another 5,000 points in the coming months?

As reported in the Economic Times, a panel of fund managers is of the view that the Sensex could very well scale 31,000 by the end of March. The reasons cited for this are easy liquidity, rising retail investor interest, improving investment climate and rebound in economic growth.

Now here is the tricky part. We agree that easy liquidity has been one of the key drivers of stock markets not just in India but also globally. Indeed, as central bankers have let loose their purse strings, liquidity has only increased. And most of this money has been finding its way into asset classes for want of better options even when the fundamentals have remained weak.

For India, the biggest party pooper will be the pace of economic growth. Recent surge in the indices have been the product of expectations that the Modi government will unleash a slew of reforms that will set India's GDP growth on a higher trajectory. This could be easier said than done.

The other way of looking at it is the pace of corporate earnings. For the Sensex to reach 31,000, assuming that the price to earnings multiple stays at 20 times, earnings of Corporate India will have to grow by around 15-20%. This does not look too difficult. But a lot of the Sensex constituents are commodity companies. And for them, the growth in earnings is linked to GDP growth. So if the GDP growth fails to take off, earnings for these companies are hardly bound to grow and higher Sensex levels may hardly be justified.

Thus, our view is that rather than predicting the next Sensex level, it would make more sense to follow a bottom up approach in stock picking. And carrying this further, investors could instead focus on picking high growth stocks that have the potential to outperform the Sensex and generate wealth over the longer term. Indeed, our team is already doing some back testing on how such 'high growth' stocks perform across market cycles. And we will keep you posted on what the results throw up.

Do you think that the Sensex will reach 31,000 levels by March 2015? Will you decide to invest in stocks based on this prediction? Let us know in the Equitymaster Club or share your comments below.

By the way, this Thursday (10th July) we will send out a special edition of the 5 Minute Wrapup covering the key takeaways from the Union Budget. Along with that a Budget Impact report, analyzing sector wise impact, will also be available for download within hours of the Budget announcement.

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 Chart of the day
The Modi government's development agenda has clearly been given the heads up judging the performance of the Indian stock markets. Indeed, the Sensex has gained around 22% in the first half of 2014, way ahead of its peers both in the developed and emerging world. But whether this momentum will be maintained will depend a lot on what reforms the new government introduces and how effectively it is able to implement the same.

Sensex has surged in the first half of 2014

If stock prices were indicators of the health of economies, then it would be assumed that the Indian economy is in its best shape ever. But as you know, this is not the case. The story remains the same in the US as well. The Dow Jones Industrial Average Index has been hovering around its all time high levels of late. But the state of the US economy is anything but healthy. As pointed out by Joseph Stiglitz, a professor at Columbia University, there is a major disconnect between stock prices & the economy and that the latter is not strong. What has been driving gains in US stocks in the recent past has been the declining unemployment rates. But as per Stiglitz, labour force participation is very low and the increase in real wages has been weak; the latter being an adjective he used to describe the recovery as well.

When it comes to valuations, the S&P 500 index is trading at levels not very far away from the highs touched in 2008; in terms of price to book value as well as the Shiller PE ratio (which is the PE ratio based on average inflation-adjusted earnings from the previous 10 years). When seen from these points of view, it does provide a scary picture. Especially because stock price rises have been driven by a mix of factors that do not necessarily suggest a strong recovery in the US economy. These include stock buy backs and rising contribution of revenues from foreign markets.

The central bank in Europe is under fire. Corporates in the Eurozone believe that the ECB is making a cardinal mistake by not toeing in line with its more popular counterparts in the US and Japan. The most popular central bank tactic of printing money has not found acceptance amongst the conservative Germans. In fact being possibly the soundest economy in the Eurozone, Germany has explicitly opposed the proposal of weakening the Euro for trade benefits. In fact, according to the Germans, currency manipulation is not a route to competitiveness. Nevertheless, its neighboring economies do not quite agree.

According to Financial Times, corporates in Eurozone are pressurizing the ECB to use the currency as a 'weapon' to stimulate growth. Readers may recall that very recently we also wrote about the IMF's suggestion to the ECB to go in for a 'full scale quantitative easing'! Now the IMF has all this while not been in favour of the US Fed's near zero interest rates. In fact it also opined that the US central bank should sooner than later try to raise rates in order to reduce its debt obligations. However, this time around the IMF seems to have contrasting views about the ECB. IMF believes that the low inflation levels in the Eurozone call for a large scale asset purchase program. And it has urged policymakers in the Eurozone, who have so far stayed away from QE to consider the same. We will not be surprised if the ECB gives in to the QE pressure sooner or later. But that would mean that the liquidity tap will keep borrowing costs at historical lows. And as a result, global risk appetite will also remain high.

The Wall Street Journal reports how India burned a record amount of diesel during the month of May. However, don't start linking this to some kind of an uptrend in the Indian economy just yet. Simply because the key factors behind the rise in consumption were the scorching Indian summers and frequent blackouts. Combine this with the frenetic pace of campaigning during the last stages of the election and the picture becomes clearer. Therefore to assume that the demand would continue to be strong would be a mistake we believe. In fact, it is more likely to revert to the trend of the past few months where diesel consumption remained low due to a weak economy.

And if this wasn't enough, exports are also likely to suffer on account of heightened competition. The article argues how Indian refiners have lost ground in Europe. Their export to the continent has fallen by 35,000 barrels per day. Their place has instead been taken by the refiners from US as also Middle East, which is building massive refineries of its own. Therefore, an uptick in the Indian economy will perhaps come as a boon to these firms we believe.

Rs 32. That's the figure that has been proposed by the C Rangarajan committee as defining the poverty line for the average rural Indian. Thus, as per this recommendation, if one's daily consumption averages below that figure, one would technically be considered 'below the poverty line'. And in an urban setting, this figure has been pegged at Rs 47. While these figures may strike you as incredulously low, they are in fact higher than the previous reference points - Rs 27 and Rs 33 respectively.

What this increase in the poverty line has done, is to increase India's estimation of its poor from about 22% of its population to almost 30%. That's a difference of almost 100 million people! This will surely burden government finances, as budget spending on subsidies and other social sector schemes will have to be extended to a much larger number of people. And comes at a time when containing the fiscal deficit has attained paramount importance. So these recommendations, if accepted, will make the finance minister's juggling act even tougher.

In order to overcome a funding crisis arising from widening current account deficit (CAD) the BRICS have thought of a novel idea. These nations are proposing setting up a US$ 100 bn fund which will provide financial help its member countries facing CAD crisis. All member countries will contribute to this fund and financial support will be extended to any country which faces a liquidity issue. Creation of such a fund would reduce reliance on IMF and other funding institutions. Apart from setting up of this crisis fund, BRICS nations are also toying with the idea of establishing a common development bank. This bank would meet the funding needs of the member nations.

We believe that steps such as these would enable BRICS to better cushion themselves against any external crisis. In the past, BRICS had been subject to huge currency volatility and funding crisis whenever the external environment changed. Take the case when the US decided to curb its bond buying program for instance. This led to a sharp outflow of money resulting in currency depreciation. Having a support mechanism like a pool fund as the one being proposed can go a long way in reducing excessive currency and CAD volatility amongst BRICS.

In the meanwhile, the Indian stock markets further slipped in the red in the post noon trading session. At the time of writing, the BSE-Sensex was trading lower by 97 points or 0.4%. Barring pharma and FMCG, all the sectoral indices were trading in the red led by metal and realty stocks. Asian markets were trading strong led by Indonesia; however Japan and Singapore were trading in the red. European markets have opened the day on a negative note.

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7 Responses to "Which is the next Sensex level being predicted?"


Jul 9, 2014

in my assessment, sensex has all the possibilities to move forward from 26000 levels from here.... come march 2015,,, sensex may test 31000 levels. having said that, all i can infer now, is that, we are starting a bull run, with the modi government,unleashing their maiden budget.hope, to get there....

Like (2)


Jul 9, 2014

yes easily 31,000 most probably 35,000

Like (2)


Jul 8, 2014

The equity market will go up only if good tax exemptions are declared for salaried persons & retired senior citizens. Moreover corporate & other public limited companies should come out with right issues instead of QIP and private placements and liberal bonus issues. Govt should have a check on corporate giants like RIL who is the biggest frod maker
in terrms of money and giving employment. In disinvestment of Navratna IPCL by making frod & giving under hand money to politicians RIL has snatched the emploment of nearly 8500 workers/officers.

Like (2)

Andrews W Salim

Jul 8, 2014

Sensex can be very well manipulated to reach 31000 figure, because it is a sheer game played by the Fiis and other institutional players. You need to run only 10/15 counters,(rest all will follow) which is well within their collective financial power. Retailers are (fodder to Institutions) still not seriously there, as it is being made out by the vested interests.

With such a poor monsoon on the top of the already ongoing recessionary scenario, the challenges of Indian economy is not well-understood neither by the public, media or nor even the so called intelligentia. All are foolishly euphoric over the new government and FII fund-flow (sic they are just fair-weather friends). As India is a huge market, every player worth would come to India, where to make money is the easiest (free of strict regulations).

Sensex will even cross above that figure also, but would settle around 20k levels.

Like (3)

P Jena

Jul 8, 2014

I think given the trend, Indian equity market SENSEX will cross 31000 level by Mrach 2015.

Like (2)

Mother India

Jul 8, 2014

Faith is most important for anything to happen . it may not hapen 100 % but reaches near to the point. When the scientist first time thought about landing over moon was ridiculous but done it because of their faith in what they are doing. Modi is cntral point for economy and billions have faith. Definitely things will improve as expected and predicted.

Like (2)

kirti anm

Jul 8, 2014

Sensex will reach 35000 by March end. I do not understand why is market nervous? This correction is healthy, the Market had gone verticaly upwards. the analyst community on one hand says by on dips and when the market dips they panic.I am sure that what has been promised by Modi Govt will be implemented. this action will definately take the market upwards.

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