Sensex Possibilities: a guest post ~ Market Updates Tips Tricks Recommendations

WIth Sensex touching new highs on a regular basis, analysts of all shapes and sizes have started to predict fantastic index levels without really explaining how and why those levels can be reached.

Despite the past few years of slowing GDP growth – a worldwide phenomenon – India continues to show positive growth. Things can only improve from here onwards – more so if a decisive government comes to power.

In a guest post, Niteen takes a look at likely Sensex levels now and in the future, based on the Market Cap to GDP ratio. History shows that Sensex doesn’t rise continuously to higher levels without occasional sharp down turns. However, the analysis provides a long-term view of possibilities.

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As the market started taking cues from the election outcome possibilities, market players started predicting various Sensex levels. Some are predicting 40,000 and others talking about 60,000. But they all are unanimous that the Sensex is going to reach new highs.

Let’s have a rational approach and try to understand the Sensex level possibilities keeping in mind GDP and Market Cap. This is the classic ratio used by Warren Buffett over a period of time to understand the valuation of the market.

India’s GDP is US$2.16 Trillion which was $1 Trillion in Nov 2007. This is a phenomenal growth because many would not have expected us to touch $2 trillion so early. GDP size-wise we are amongst the top 10 nations in the world. If we had continued to grow at 9% per annum then we would have become a $5 Trillion economy by 2024.

We all know that the growth rate came down from above 9% levels to now below 5% and reasons are known, discussed and debated widely. Having said that, we could still achieve an average growth of 7% which is a very conservative number considering the aspirations of people of India. If we could continue to achieve just an average growth rate of 7% YoY then the $5 Trillion economy number will come by 2027 instead of 2024.

In fair market scenario, GDP to Market Cap ratio is 1 or 0.9. Presently, the Sensex is at 22600 levels with Market Cap of US$1.38 Trillion and GDP is $2.16 Trillion. The current ratio of total Market Cap to GDP is 0.64. The historical high was 1.65; the historical low was 0.41 and fair market value will be around 0.9.

I have taken three scenarios: best case (GDP to Market Cap ratio of 1.5), worst case (GDP to Market Cap ratio 0.4) and base case (GDP to Market Cap ratio 0.9) and drawn the Sensex levels keeping in mind the average GDP growth rate of 7% starting from 4.5% of this year in the below table. I have provided the projected Sensex levels under all the three scenarios.

Sensex levels
Year	Best Case	Worst case	Base case
2014	53061	14150	31837
2015	55714	14857	33428
2016	59057	15748	35434
2017	63191	16851	37914
2018	67930	18115	40758
2019	73364	19564	44019
2020	79600	21227	47760
2021	86764	23137	52059
2022	94139	25104	56484
2023	101671	27112	61002
2024	108788	29010	65273
2025	115859	30896	69515
2026	123390	32904	74034
2027	131410	35043	78846

If the economy reaches $5 Trillion then the Sensex number should cross 50,000 while maintaining the same Market Cap to GDP ratio of 0.64. If the ratio goes up from 0.64 to 0.9 or 1.0 the market could cross 80,000. Looks ambitious but still very much possible…

The scenario presented above is especially important to highlight the importance of long term investment v/s short term gains. In short term, we have several hiccoughs which come in our way. So just basing our decision on the election outcome may not be a good idea. During last few years the market had been hammered with lot of negativity. It is not that many of them were not true. It is also true that the scenario will not remain the same. Good old days of 9% GDP growth is not there today but the next government, whosoever comes to power (Modi/Congress/Third front), will have to start initiatives to take the economy out of its slumber. Most analysts are predicting numbers based on best case scenario. However, a likely possibility is of base case scenario over a longer period.

I look forward to receiving your views.

P.S.: I have taken an average 7% GDP growth. The government is expecting a GDP growth rate of around 4.5-5%. I have taken a GDP growth rate of 4.5% for the current year and gradually increased it while keeping the average of 7% for the duration. We might have some period when the economy may grow faster than average and vice-a-versa.

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(Niteen is an MBA and cleared CFA Level 2, CFA Institute USA. He also conducts investor education sessions, writes blogs. A firm believer in long-term financial planning, and a 20 years veteran of the stock market, he likes to analyse the economy, and individual stocks.

Niteen blogs at Investment ideas .)