Sensex at 100,000: Possible or Far Fetched?

One of the world's richest man, Jeff Bezos, the CEO of Amazon visited India in 2020 just before Covid struck.

The highlight of his short trip to one of the most crucial markets for Amazon was the townhall held with Amazon India employees.

Moderated by Shahrukh Khan, the event was a perfect blend of wit and humour. The highlight of the conversation was a strong prediction Bezos made for India.

Businessmen normally equate prospects of a country or an asset class to a time frame of a decade or two. Like how the decade post the 90s had China stamped all over it or the decade of IT outsourcing boom for India post 2000.

Bezos dressed in traditional Indian attire, asserted that the 21st century will the India's century, India's time to shine. I have seldom seen people like Bezos make such bold prediction. I mean, saying the next 80 years will belong to India is a strong and a bold statement.

I thought about getting data and statistics in to the picture so as to validate such a statement. After all, even if history doesn't repeat itself, it often rhymes.

The key is to look at economic parameters, demographics and link them to stock market performance. After all, every Diwali I hear that the mother of bull markets is here. Sensex targets of 100,000 are peddled every year.

In my view, it's one thing to be an optimistic but as an investor it's also important to gauge reality.

Let's look at the two major economies the US and China.

Economy’s size (US $)	Time taken (Years)	Marketcap to GDP (%)	Returns in local currency (CAGR)
500 bn to 1 tn	10	NA	55%
1 tn to 2 tn	8	NA	0%
2 tn to 3 tn	4	38 to 39	7%
3 tn to 4 tn	3	39 to 40	8%
4 tn to 5 tn	4	40 to 53	13%
5 tn to 6 tn	3	53 to 68	12%
3 tn to 6 tn	10	39 to 68	11%

Data Source: Harish Krishnan's blog

From the above table, the best return for stock markets for the US was when the economy crossed the US$ 4 tn milestone and touched the US$ 6 tn level.

The benchmark indices gave a 11% CAGR return over 10 years. That's phenomenal. Imagine what it meant for the mid and smallcap stocks where the returns are much higher.

Another case in point is the metric marketcap to GDP ratio. During the initial years when GDP grows, the marketcap of stocks takes time to re-rate.

Marketcap means two things. One is earnings growth. GDP growth lifts earnings. Second is the rerating of the PE multiple for stocks. Both will propel the market higher.

In the US stock market, while the GDP was climbing higher in the initial years, the marketcap to GDP wasn't rising proportionately. It's after the economy crossed the US $ 4 tn level, the marketcap to GDP jumped disproportionately.

Let us also look at the Chinese market.

Economy’s size (US $)	Time taken (Years)	Marketcap to GDP (%)	Returns in local currency (CAGR)
500 bn to 1 tn	4	NA	-20%
1 tn to 2 tn	7	NA	-5%
2 tn to 3 tn	2	18 to 126	59%
3 tn to 4 tn	1	126 to 39	-13%
4 tn to 5 tn	1	39 to 70	-10%
5 tn to 6 tn	1	70 to 66	20%
3 tn to 6 tn	3	126 to 66	-2%

Data Source: Harish Krishnan's blog

Unlike the US stock market, China's exponential growth happened from US$ 2 tn to US$ 3 tn.

However, the expansion of GDP from US$ 3 tn to US$ 5 tn saw a decline in stock markets. It's important to note the years of decline in the stock market coincided with the global financial crisis.

While US$ 3 tn to US$ 6 tn was a sweet spot for USA, it didn't work for China.

Where Does India Stand?

Economy’s size (US $)	Time taken (Years)	Marketcap to GDP (%)	Returns in local currency (CAGR)
500 bn to 1 tn	5	33	34%
1 tn to 2 tn	7	161	7%
2 tn to 3 tn	7	83	12%

Data Source: Harish Krishnan's blog

When Will the Elephant Dance?

If you look at the current picture, the India is in a sweet spot.

In terms of valuations, the marketcap to GDP ratio is at 83% while the economy is doing well.

The reason why China's GDP doubled in little over 3 years was primarily due to massive infrastructure spends. The Chinese are known to create supply before demand.

If we look at India, massive public sector capex has already kicked in while the private sector is expected to increase. While China was more of an export story, India is more of a consumption story.

While there is no established co-relation on when stock markets react to GDP growth, India is in a sweet spot right now. Supportive valuations along with high growth can re-rate stock prices over the next few years.

So the question is not whether the elephant has started to dance, but how fast can it dance.

Don't miss the India story.

Warm regards,


Aditya Vora
Research Analyst, Hidden Treasure
Equitymaster Agora Research Private Limited (Research Analyst)