Chart 1: The love and hate of greed and fear.
So, whatever did happen to the Index reaching 21,000 by July 2010?
To refresh our memories, this is what I had predicted at an equitymaster webinar on November 7th, 2008 (please note that the BSE 30 Index had closed at 9,734 on November 6th, 2008).
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"Equitymaster: Just to take that a bit forward, when do you see the Sensex reach its recent high again? In how many years, if you want to take a call on that?
Ajit Dayal: I'd hazard a guess within two years. I'd say within the 2 years you can have an Index that is easily 20,000, 25,000, within two years. That's based on the premise that company earnings will come through in India and the fact that valuations will go back to a kind of a median average. Right now the markets are trading at 10 times or below 10 times earnings and the average PE ratio for the market over the last decade has been about 15 times. So if you took 15 PE ratio, you are already seeing a 50% upside from where you are and if you add the earnings growth that could happen over the next year and a half or two years, then you can be close to a double or more than a double, from where you are today."
Well, firstly let me remind readers in my defence that - in November 2008 - with the BSE-30 Index falling off the cliff most people were predicting an Index that could slide into a bottomless pit.
The gloom and doom views spoke about the BSE-30 Index settling at 6,000 - a further decline of -30%. The Indian Rupee had slipped by -20% adding to the losses faced by NRIs and FII's and threatening a shut down of global capital flows into India's stock market.
If foreigners don't buy, was the mantra, the Index will collapse further.
Sell, was the advice to local investors, before the market sinks into the abyss.
So, was I giving this "bullish view" of 20,000 just to be different?
Was the prediction of a +100% surge in the BSE-30 Index made because I was smoking some non-tobacco items and was hallucinating?
Repeating the prediction!
It looks like my "highs" have not left me!
At the next Equitymaster webinar in March 2009 and for some video clips placed on YouTube on May 16th, 2009 - just after the election results - I gave a more precise level of the BSE-30 Index: 21,000 by July 2010.
At that time, the Index had just broken out of the 8,000 to 10,000 range where it was stuck since October 2008. In fact, the Index had crossed 12,000 but the market expectations were that it would head back down towards 10,000 after the election results were announced. The election results propelled the market to break through the 14,000 barrier.
On February 8th 2010, at the Equitymaster WebSummit I reiterated the view that, on fundamentals, the Index could be at 19,000 and - with some frothiness and the search for a "safe haven' the power of money flows could see the Index at 21,000
Sure, there were the risks that I had noted earlier: the US economy, the global economy, and the emotions of investors. But, from an "earnings" perspective, investing in the Indian stock market seemed like a great idea. The index was "range-bound" at the 15,000 to 17,000 levels and would probably head up.
On June 4th 2010, the Index was 17,118. At an equitymaster webinar the next day, I went one step further and said that the Index could head up to 31,000 by July 2012.
Boy, people must be thinking, whatever this guy is smoking it must be great! Not only does it make him chirpy and cheerful, it makes him chirpier and more cheerful over time!
No negative loopback after-effects in this stuff.
The honest truth is that I don't smoke.
Tobacco or non-tobacco items,
And I don't "drink" either.
Well, I may be tempted to have one glass of beer in a year.
No, sire, why pay for all that intoxicating, lung-wrenching stuff when you can be high on earnings and the optimism of future earnings!
Yes, the simplicity of my arguments for a 21,000 or a 31,000 Index are based on earnings (a fact) and the multiple that people are willing to pay for them (a guesstimate of the mood swings of the bulls and the bears).
The moods of the market
The markets, as we all know, go through wild emotional swings. As we have all seen, they oscillate between greed and fear.
A recent Chart of the Day on www.equitymaster.com showed the wild ride of the Price/Earnings Ratio (P/E). For the BSE 100 Index, the PER was 30x in January 2008, then it slid to 11x by October 2008, picked up to 24x by October 2009 and is 21x in June 2010.
The P/E is what people "feel" about the earnings that the companies generate - depending on their views of the future, the bulls and bears are willing to pay a higher P/E (optimisim) or a lower P/E (pessimism).
But, what exactly are the earnings (E) of the companies doing over time? And at what price is the market as shown by the BSE-30 Index (P) trading over time? What have been the trends of the P/E Ratio over time?
Table 1: How the P/E ratio has moved in 13 years.
|Year ending March 31st
||The Earnings of the companies in the BSE 30 Index (E)
||The BSE -30 Index on that date (P)
||The historical P/E Ratio
||Average = 18.7
So, based on all this data we can see that - over the past 13 years - the average P/E Ratio of the market has been 18.7.
There have been global and Indian crises and droughts and floods over this period, just as there have been boom times and bubbles.
There have been scams and scamsters; fake IPO's from India's wannabe-like-Wall Street firms; and true-blooded scams from the blue-blooded Wall Street firms.
We have had the same pathetic sort of lack of governance. In fact Jawahir Mulraj - the author of Straight From the Hip - makes a case that governance has gotten worse.
The market, being frightened or pleased by some event has given a range of P/E ratios from a low of 12.3 on March 31, 2009 (the depths of the current global financial crisis) to a high of 26.3 on March 31, 2000 (the peak of the technology, media, and telecom bubble).
On average over these 13 time-points, the PER is 18.7.
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And what about the future earnings?
Since October 2008, a few weeks after the collapse of Lehman Brothers, the research analysts employed by the brokerage houses have been a depressed lot.
They saw blood on the streets and they saw blood in the sky. They saw red ink on their personal portfolios and they saw red in their forecasts on the future of corporate India's earnings.
But, as the Indian economy recovered from its minor fade and - more importantly - as the value of their personal portfolios grew, the research analysts have been happy to make slightly higher estimates on what their expected earnings per share (EPS) of the BSE 30 Index companies are likely to be.
Their jobs are secure and the bonuses are rolling in again. But the Lehman memory is still a little fresh in their minds. Give them a few more months of good GDP data and a slightly better flow from FII's and they will be ready to see solid green - with rose coloured glasses.
Table 2: as the economy recovers, the fear fades away...
Source: Bloomberg consensus earnings estimates for the BSE-30 Index
|Estimate made for earnings by research analysts working for broking houses
||Actual March 31, 2009 EPS for BSE-30 Index
||Estimated EPS for March 31, 2010
||Estimated EPS for March 31, 2011
||Estimated EPS for March 31, 2012
|In October 2009
|In March 2010
||These were actuals, so no changes
||7% better than earlier estimates
||10% better than earlier estimates
||Be prepared for this to be increased!
Not only will they "up" the earnings estimates for March 2012 but they will use the data in Table 1 to tell their clients why India is the best buy and is trading "at the lower end of its historical range".
The BSE-30 Index, they will say, is ready to reach a new plane.
For this, they will use Table 3 to explain why companies in India will have a higher growth rate in the Earnings, and why the Indian companies deserve a higher P/E Ratio (of 20.9x or some such number) all of which will result in a BSE-30 Index of 30,000.
Table 3: How the P/E ratio has moved in 13 years.
Source: the idle mind of Ajit Dayal with no influence from any intoxicants
||Earnings of BSE-30 Index
||P/E ratio likely
||18.7 - the average of the past 13 years
||But a better P/E ratio
||20.9 - what it was in March 2010
||And a better P/E ratio
||1,216, increase of +10%
||20.9 - what it was in March 2010
||1,436, increase of +10%
QED - the science of unscientific common sense
So, there it is.
No brilliant insights, no great khabar from any insider, no market guru telling us what to do.
The BSE-30 Index which was supposed to head to 21,000 by July 2010 now looks on course to head to 30,000 by July 2012.
I don't know what you are doing about these forecasts, but I like them.
You can call me an "uneducated moron" as one reader very politely wrote to me for missing the 21,000 (so far!) by July 2010 but getting the first 100% from a 9,000 Index in November 2008.
For those looking for a specific Index number to "bet" on, many apologies for missing the target.
But for those who are willing to apply the very uncommon characteristic of common sense, you can sit down and plan where to invest your savings for the long term and ride the trend of earnings growth based on better GDP numbers in the Indian economy. Keep investing and avoid false promises (except those that "promise" a 30,000 Index.J)
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