»Profit Hunter by Equitymaster

On This Day - 21 NOVEMBER 2018
The Markets Are Going to Go Up! And Here's Why...

Richa Agarwal, Research analyst

Have a close look at the chart below of the BSE Small Cap Index since 2003...

What stands out the most?

For me, two things are clear:

  1. Over the last 15 long years, the index has kept seeing massive fluctuations.
  2. Despite these large fluctuations every now and then - the overall trend of the index has been upwards.

Beginning from when the small cap index was calculated i.e. April 2003 to now, it has appreciated over 17 times over these 15 years.

That's a percentage return of 1,636%.

And a compounded annual return of 20%.

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That's an amazing return by any standards. This underlying upwards bias of the index stocks has meant that even if you just passively bought the index stocks over this period and just forgot about all the ups and downs that happened in the interim - including the fall this year - you'd still be sitting today on a very lucrative result.

Further, if you'd picked the right fundamentally strong small caps - you'd likely be sitting on an even better result.

So why has the market's overall trend been upwards? Wil this continue?

For the uninitiated, the movement in the BSE Small Cap Index is nothing but the movement of the market value of all stocks that make up the index put together.

And it shows, in as clear a fashion as possible, the growth in the market value of Indian companies over time. It exemplifies that as the Indian economy has grown in size, this combined market capitalisation has moved up.

Why?

Well, it's pretty simple. Growth in the economy is nothing but growth in consumption by the people. As Indians consume more goods and services over time - corporate India is going to sell more to them over time.

And as their business volume increases, so will their profits. And with rising profits come higher market valuations.

Thus, as the chart shows, this trend of rapidly increasing market values of Indian companies that has been happening since 2003 will only continue in the years to come.

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Yes, there will be ups and downs in the short run... in the near future...

But over the long term, it is headed only up.

Only if Indians ever stop aspiring to live better lives, or if our system in India changes on a very fundamental level that prevents people from doing so - is the only way in which this process will stop.

And we don't see any reason whatsoever for that to happen.

That's precisely why the Indian markets - and along with that small cap stocks - can go in only one direction over the long term: Up.

Nothing else - not panics, market crashes, economic crisis', recessions or anything else in between - can change that.

Regards,

Richa Agarwal
Richa Agarwal (Research Analyst)
Editor, Hidden Treasure

PS: Small cap stocks pose an enormous opportunity for wealth-building. Especially now, when the stocks are so much cheaper than they were just a few months ago. Invest in these stocks now - before it starts rising. Be ahead of the curve - sign up to get the top small cap recommendations of all time.

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