Sensex 4,20,000: Coming in 15 years at a stock market near you - The Daily Reckoning
The Daily Reckoning by Vivek Kaul
On This Day - 4 December 2014
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- By Vivek Kaul

Vivek Kaul
It is that time of the year when stock brokerages forecast their Sensex/Nifty targets for the next year. A few such reports have landed up in my mailbox and the highest forecast that I have come across until now is that of the Sensex touching 37,000 points by December 2015.

I was thinking of writing a piece around these forecasts, until I happened to read an interview in which big bull Rakesh Jhunjhunwala said that he would disappointed if the Nifty doesn't hit 1,25,000 by 2030.

Nifty currently quotes at a level of around 8,500 points. The logic offered by Jhunjhunwla is very straightforward. He said that the earnings of stocks that constitute the Nifty index will grow by fifteen times over the next fifteen years. And that would take the Nifty to a level which is fifteen times its current level ( actually 15 times 8500 is 1,27,500, but given that Jhunjhunwala was talking in very broad terms let's not nitpick). Hence, Nifty will be at 1,25,000 by 2030.

How reliable is this forecast? Not very, is a straightforward answer. A period of 15 years is too long a time to make such a specific forecast on the stock market or anything else for that matter. There are many things that can go wrong during the period (or go right for that matter). Hence, such forecasts need to be taken with a pinch of salt and seen as something that has an entertainment value more than anything else.

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In matters of forecasts like these it is important to remember the first few lines of Ruchir Sharma's Breakout Nations - In Pursuit of the Next Economic Miracles:" The old rule of forecasting was to make as many forecasts as possible and publicise the ones you got right. The new rule is to forecast so far into the future that no one will know you got it wrong." Jhunjhunwala has done precisely that.

If earnings have to grow by 15 times in 15 years, the Indian economy also needs to grow at a breakneck speed. Over a very long period of time, the companies cannot keep growing their profits unless the economy grows as well. For 15% earnings growth to happen, the economy needs to grow at a real rate of 8-10% per year (the remaining earnings growth will come from inflation).

The trouble is that this kind of rapid long term economic growth in countries is an extremely rare phenomenon.

As Sharma points out in Breakout Nations:"Very few nations achieve long-term rapid growth. My own research shows that over the course of any given decade since 1950, only one-third of emerging markets have been able to grow at an annual rate of 5% or more. Less than one-fourth have kept that pace up for two decades, and one tenth for three decades. Just six countries (Malaysia, Singapore, South Korea, Taiwan, Thailand, and Hong Kong) have maintained the rate of growth for four decades, and two (South Korea and Taiwan) have done so for five decades."

In fact, India and China which have been among the fastest growing countries over the last ten years, were laggards when it come to economic growth. "During the 1950s and the 1960s the biggest emerging markets - China and India - were struggling to grow at all. Nations like Iran, Iraq, and Yemen put together long strings of strong growth, but those strings came to a halt with the outbreak of war...In the 1960s, the Philippines, Sri Lanka, and Burma were billed as the next East Asian tigers, only to see their growth falter badly," writes Sharma.

Long story short: Rapid economic growth cannot be taken for granted and given this forecasts like Nifty touching 1,25,000 at best need to be taken with a pinch of salt. Indeed, Jhunjhunwala had predicted in October 2007 that the Sensex will touch 50,000 points in the next six or seven years.

Its been more than seven years since then and the Sensex is nowhere near the 50,000 level.

In October 2007, India was growing at a rapid rate. At that point of time it was almost a given that the country would continue to grow at a very fast rate. In fact, this feeling lasted almost until 2011, when the high inflation finally caught up with economic growth and the first set of low economic growth numbers started to come.

Also, Jhunjhunwala and most other stock market experts did not know in October 2007 that more or less a year later, the investment bank Lehman Brothers would go bust, and the world would see a financial crisis of the kind it had never seen since the Great Depression.

The stock market fell rapidly in the aftermath of the crisis. Once this happened the central banks of the world led by the Federal Reserve of the United States, printed and pumped money into their respective financial systems.

The idea was to flood the financial system with money so as to maintain low interest rates and hope that people borrow and spend, and in the process get economic growth going again. That happened to a limited extent. What happened instead was that big financial institutions borrowed money at low interest rates and invested it in financial markets all over the world.

In the Indian case the foreign institutional investors (FIIs) have made a net purchase of Rs 3,19,366.35 crore in the Indian stock market between January 2009 and November 2014. During the same period the domestic institutional investors sold stocks worth Rs 1,27,280.1 crore. The massive financial flows from abroad have ensured that the BSE Sensex has jumped from around a level of 10,000 points to around 28,450 points, during the same period, giving an absolute return of around 185%.

The point being that despite this massive inflow of money from abroad, the BSE Sensex is nowhere near the 50,000 level that Jhunjhunwala had predicted in October 2007. Over the long term a lot of things can go wrong and which is what happened after 2007.

To conclude, let me ride on Jhunjhunwala's forecast and make my own forecast. Jhunjhunwala has predicted that the Nifty index will touch 1,25,000 points in 2030. This means the Sensex will cross 4,16, 420 points in 2030.

How do I say that? The Sensex currently quotes at around 28,450 points. In comparison, the Nifty is at around 8,500 points. This means a Sensex to Nifty ratio of around 3.33.

Hence, when Nifty touches 1,25,000 points, the Sensex will touch 4,16,420 points (1,25,000 x 3.33). For the sake of convenience let's just round this off to 4,20,000 points. I know, the world is not so linear. If forecasts were just about dragging a few MS Excel cells, everybody would be getting them right.

But then it is the forecast season and everyone seems to be making one, and given that even I should be making one. And if in 2030 I am proven right, I will search this column and tell the world at large that I said it first way back in late 2014 on The Daily Reckoning.

To conclude, dear reader, remember you read it here first. That's the trick and I know how it works.  

Where do you see the Sensex heading to in 2015? Post your comments or share your views in the Equitymaster Club.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

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23 Responses to "Sensex 4,20,000: Coming in 15 years at a stock market near you"

Naveen Sood

Feb 20, 2016

Indian stock markets have grown by 11.5 % per annum historically over the last 25 years. Assuming that this trend will continue (given the GDP growth and inflation Matrix), we can draw make our own calculations of the Sensex target in 2030.

Like (1)

RAM

Dec 29, 2014

It is the 'Modi's verbal magic' and more than expected support the ruling party got in the elections, the sensex has picked up break neck speed and reached the present stage. That means we are running very high risk by banking on the skill and tenacity of an individual i.e MODI to achieve results. If Modi becomes weak, petroleum prices starts growing up and security situation becomes clumsy, the growth story will falter in no time. Let us not be too greedy and ambitious and get into difficulty sooner than we think. The FIIs can play a spoilt sport any time and export performance can tilt the value of Rupee in no time. A falling rupee will dash hopes in no time!!It is only matter of time lot of greedy investors will have their back kicked beyond imagination!!

Like (5)

D K PURWAR

Dec 28, 2014

Nifty & sensex will perform better in next 4& 1/2 yrs and i have no doubt reaching 50000+. If we get again single majority govt in next election .prediction of Rakesh will be possible

Like (4)

raman kumar

Dec 17, 2014

In second half of 2007 similar forecast of sensex reaching 30000 to 40000 in next 5 years came from some brokerage houses/brokers but after couple of months later we find sensex nosediving from 21000 to 8000 and lot of investors not only burnt their fingers but lost their fortune and hard earned money. One must not be carried away by these tall forecast rather invest sensibly and after doing some research and homework

Like (5)

Praveen D

Dec 13, 2014

In the last 24 years the sensex has gone from 1000 to 28000.I feel the sensex will move to max. 75000 in the next 15 years.When the sensex was 15000 everyone started predicting 40000-50000 but it went to 21000 & collapsed in 2008 to 8000 level. Don't follow any tips or anyone blindly.Do your research..before investment...

Like (5)

Bhaskar Roy

Dec 11, 2014

I bought couple of funds in 2005 and sold early this year. In both the funds, I actually lost money. Indian market is too unpredictable because weird political situation. One Govt does something, next one unwind that. People are too optimistic since Modi got the chair, but so far only thing has happened - Oil price has dropped on his own, that's all.

Like (6)

Akhil

Dec 9, 2014

One thing is sure. Mr Jhunjhunwala is a real bull and huge risk taker. Moreover, he believes in India more than even a common man. He already had admitted that he trades very badly with his 30% capital. that means a lot. so no one should run after jhunjhunwala madcaps and smallcaps. he can ruin u badly. No complains !!

Like (4)

DR ANIL GUPTA

Dec 9, 2014

NO body can predict future ,as per Random Walk Theory of Burton G. Malkiel ,as markets are very efficient in long term according to efficient market hypothesis EMH by Fama and french Nobel prize winner of 2013 in economics for their 3 factor model and MPT market portfolio theory of Markowitz and sharpe nobel prize winners in 1990 proved that only Diversification can lower risk with out reducing returns,For individual or pros Investors best way to invest is forget to beat the market in long term ,as it is impossible ,best is to invest in a low cost passively managed portfolio of index funds with 60/40 stock/bond ratio . best 3 fund portfolio by John c. Bogle the inventor of first index fund in 1975 is 1. Total stock market index fund 40%2. Total international market index fund 20% and 3. Total bond market index fund 40% . this three fund portfolio with expense ratio below 0.5% can beat every stock picker or active fund in long term as low cost matters in long term ,because of magic of compounding the 8th wonder of the world as said by Albert Einstein. DR ANIL GUPTA MD

Like (4)

vageesh

Dec 8, 2014

Now the season has begun for forecasting Indian Indices. Forecasting future is hazardous . Tomorrow is another day and we donot know what future holds for us . Do we have crystal ball to gaze into the future ? Certainly I donot have one .Let us assume Indian Economy is still in nascent stage of growth. All the ingredients are there and what is needed is a cook to prepare the dish. Have we found one ? Cannot say any thing one as of now . One at the helm has the wherewithal to take the economy to greater heights. Only when the results start unfolding we know Till such time keep the fingers crossed . Assuming the wild guess turns out and becomes a reality , what is the amount of money needed to drive the Indian Indices to stratosphere levels in 2030 . All the money staked in banks as FDs and money invested elsewhere should find its way into stock market . Is it possible ? we will come to know only in 2030. till such time it is suspense or guessing game. It is better to assume Indian companies will grow going forward and that will be reflected in improved share prices, and invest in stocks. That to happen India should have leaders with imagination . Even India has leaders who have imagination do the Indian electorate elect them ? once they gave the chance to Dr Singh and saw the result. are there enough leaders ? 2030 is still far off .

Like (4)

Tirtharaj Khot

Dec 7, 2014

Vivek, you will agree that for traders stock market is a Zero Sum Game. Its only for those who invest with an intention to buy businesses, because they themsleves can not do due to lack of capital, expertise etc, that some good news will come from market in the form of tax free dividends, increased valuations in the form of stock splits, bonus issues etc that too if held for long period if time. Long periods shoule be like 10 years and upwards as the time must take couple of cyclical ups and downs in its strides to mature the investment levels. Therefore it is my suggestion that investments should be made mostly with above logic, and therefore will surely obviate the need to even look or read at such predictions let alone making ones. So conviction in the Company and its business, relation to the country's economic condition etc must be the guiding force for making the investments and stay invested for longer terms as mentioned above, No one will loose.

Like (5)
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