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Sensex May Breach 100k in 5 Years as Reforms Take Hold

08 July, 2021


          
            Sensex May Breach 100k in 5 Years as Reforms Take Hold

The Sensex, which first hit 1,000 in 1990 took almost three decades to touch the 50,000-mark, crossing many negative milestones such as the Harshad Mehta Scam, the Dotcom Boom and subsequent Bust, followed by a resurgence till the Global Financial Crisis, then a sharp rally till the European Debt Crisis and then the Covid-19 Pandemic. 50,000 in 3 decades. Let that sink in!

Keep in mind that during this period traditional asset classes (like gold and real estate) were preferred. There was low awareness of equity market investments. Transacting was not easy. Brokers had to be given instructions the day before the market opened. Shares were held in physical form until dmatting of shares became mandatory. And there was no handheld technology to transact. All key deterrents to the growth of the Sensex! In spite of these, the Sensex registered around 14% CAGR growth over the last 30 years.

So what is the current situation?

Bear in mind that the all the above negatives of the past three decades are invalid now. Even in this time of crisis, the average Indian is benefiting from the ongoing focus on financial inclusion. There is ease of trading, your mobile has the power to help you transact. The dismal returns from traditional asset classes, improving share of households’ investments in equities/debentures and mostly the rising awareness among millennials are likely to aid equities in the long run.

Robust foreign liquidity inflow by international investors catapulted the BSE Sensex beyond 50,000 in the first month of 2021. A revival in earnings growth and structural reforms can propel the index to the 100,000-mark in the next five years, or even earlier, market experts said, Know More.


Rule of 72

Take the number 72 and divide it by the annual rate of interest that your money is earning to determine the number of years it will take for your money to double.

“Crudely, every 10 years, Sensex has grown 3-fold. In the last 20 years, it has climbed 10-fold. Going by that analogy, the index should hit 1,25,000 to 1,50,000 by 2030. Simply speaking, if Sensex grows at 15-16 per cent CAGR, then by the Rule of 72, it can hit 1,00,000 in the next 4-5 years. However, this calculation assumes economic growth and conditions remain slightly better than what they are today”

Dr. Vijay Kedia
Managing Director
Kedia Securities Pvt Ltd.


Do we think that 1,00,000 is possible?

Fundamentally, if you see, the last 20 years’ earnings growth for the Sensex has been 10.5% and the returns over the same period have been 13% on a compounded annual growth rate (CAGR) basis. Assuming the same continues … with the higher base, we should be hitting 100,000 in the next 6 years! Even if we pessimistically assume that there will be a drop in the GDP due to COVID waves and the average annual return comes down to 8%, we are still not looking beyond 2030 for the Sensex to breach 1,00,000.

Where will the growth come from?

We feel that the growth will be led by IT services, financials, logistics, telecom, and pharma. If you are keenly tracking the grow back of the Sensex from 26,000 last march to 50,000 in Jan this year, you will note that businesses in these sectors continue to reach the Indian masses and hence ensure a sustainable growth trajectory. They are also the ones leading the charge of the Sensex.

Amar Ambani, Senior President and Institutional Research Head, Yes Securities, is super optimistic. He believes that the Sensex may cross the 1,00,000-mark by 2025. “We have entered a super-cycle for Indian equities, as we had seen in the year 2003. We see a high possibility of decisive reforms from the government, accelerated earnings growth and a continued liquidity flow chasing growth, in a period of weakening dollar," he said.

Foreign institutional investors led the investments in Indian markets in 2010-20. During the decade, FII investments in Indian equities stood at $107.38 billion, with only four years of outflows. Domestic institutional investors (DIIs) have invested $23.94 billion in Indian shares, with mutual funds being the major contributor till 2020. Post the pandemic, we have seen many investors exit the mutual fund market thinking that it is better to conserve cash. At the same time note that about a million demat accounts are being opened every month in India, nullifying the effect of the retreating funds from FIIs, Read More.


“Before Covid 19, there was low awareness about equities. Traditional investments were in gold or real estate. Transacting was difficult and not in real time. Today technology is enabling easy participation in equities and work-from-home has opened the commoners eyes to the magic of the Sensex. The outlook for domestic equities is bright.”

MIMI PARTHA SARATHY
Managing Director,
Sinhasi Consultants Pvt. Ltd.



Conclusion

We would like to take a stand on equities. They are likely to remain the best investment avenue from a long-term perspective, and the benchmark index is poised to maintain a long-term growth rate of 8% -14% in the coming years. There is no fighting the fact that we are going to see 100,000 by 2030 at the latest and if our luck holds out as it has been doing, we may even see it by 2025!

We urge you to have conversations with financial advisors who have seen and navigated these cyclical rises and falls. They are in the best objective position to help you understand and mitigate the risks of letting emotion get the better of you.

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