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Sensex: Journey since 80's

Dec 12, 2003

The benchmark BSE-Sensex closed at the landmark 5,300 levels yesterday, nearly 4 years after doing so in January 2000. The bull run in 2000 continued till February that year, only to continuously decline. So what's in store this time around?To put things in perspective, let's compare some stats of FY00 with the current trends. In FY00, the country finished with a GDP growth of just over 6%. Most FY04 estimates suggested a GDP growth rate of 6.5%-7%. As per statistics, cumulative investments of FIIs till March 2000 stood at around Rs 45 bn. The cumulative figure in December 2003 stood at over Rs 900 bn. In 2003 alone, FII net investments stand at Rs 311 bn (Source: Sebi website).

If we look at it from the valuation perspective, the BSE 30 index on January 3, 2000 (which closed at around 5,375 levels that day) was trading at an average P/E multiple of more than 22x FY99 earnings. Comparatively, the Sensex is trading at 15x trailing twelve months earnings.

What does the above data signify? If we are looking for an answer to the Sensex movements going forward, these stats may not help much from a short-term perspective.

But from a longer-term perspective, when you consider the fact that in January 1980, the Sensex was trading at just above 100 levels, in January 1990 it was trading near the 680 levels, in January 2003 at around 3,250 levels, the picture emerges a little clearer for a growing economy like India. If we calculate the returns purely on the BSE Sensex index in the last 24 years (1980 to 2003), it works out to be a decent 16% CAGR.

The point we are trying to make here is that Indian investors should stop looking at the Indian stock markets as a 'punting' arena to make quick bucks. It is this greed (or short sightedness) that has proved to be the bane of the retail investor. Rather, investors need to look at equities as a necessary part of their continuous portfolio (much like gold, real estate, FDs, NSCs, PFs and insurance). Stock market investing needs discipline and patience to bear fruit, much like any other investment avenue. Short-term investment decisions are unlikely to make kings out of paupers overnight, much less achieve your desired financial goals.

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