Phir ek baar Modi Sarkar !
The Sensex welcomed the Election mandate and has hit 40,000 in a bout of euphoria – the highest it’s ever been.
Politics and economics have a very symbiotic relationship and go hand in hand. Political stability plays a crucial role for a flourishing business environment. With the Modi government returning to power with a majority in the Lok Sabha, investors seem assured of a stable government and also expect the government to push through the much needed economic and structural reforms to give a boost to the economy.
The Modi victory should also bring back investors who had been waiting on the sidelines owing to the political uncertainty. Thus stock prices may show strength in the near term. But once the markets have adjusted to the new reality, the focus will shift back to the economic realities and earnings.
As the saying goes, in the short term, markets move because of Sentiment and liquidity but in the long term, earnings move the markets.
The question everyone is asking now is, “Will the Sensex Double under NAMO 2.0?”
Historically, the Sensex since 1986 to 2019 has done 6 doubles. It has been doubling on an average every five and a half years to reach a level of 40000 currently.
Since the Inception of Sensex, a study of the performance under the various governments shows the poor record of Sensex performance under the NDA rule. Both under Mr. Vajpayee and Mr. Modi, the Sensex has only given single digit returns as compared to high double-digit growth of more than 20% under the Congress and close to 18% growth under Mr. Manmohan Singh led UPA.
The current market valuations are also on the higher side as compared to 2014.
The Sensex grows due to increase in earnings or when the investors are willing to pay a higher multiple for the earnings due to high expectations of future growth and a jubilant sentiment.
At the current steep valuations, any growth in Sensex will essentially have to be an earnings led growth. The scope for valuation led growth of Sensex is limited as the valuations are already too stretched and trading at historic high levels.
Most Sectors are also trading at levels much higher than their 10-year average.
The Sensex needs to grow at close to 15% CAGR for the Sensex to double from current levels by the end of the term of Namo 2.0.
The Sensex has historically grown at around 16% CAGR since inception. The Sensex CAGR in the current century however has been lower at 11.56% and in the last decade, even lower at 9.19%
Hence, what is the way forward for the Sensex?
“Stock Returns are Slave of Earnings growth”- Warren Buffet
Historically, the Sensex EPS and the Sensex growth have a direct correlation as can be seen from the chart below.
At current Sensex EPS of around 1450(June 2019), Sensex is trading at 28 times trailing PE multiple. For Sensex to Double in 5 years, at current valuations, the EPS of Sensex companies has to reach around 3000, at a CAGR of 15.65%
However, if we get back to a long term average valuation of 19 PE multiple, then Sensex EPS has to reach close to 4200, a growth of almost 3 times current level and a CAGR earnings growth of 23.7 %.
Markets everywhere are the slaves of earnings. When you buy a stock, you essentially pay a multiple of the earnings.
The essential problem with the market has been the low earnings growth since the last 20 odd quarters. The earnings growth of the Sensex companies has averaged in single digits.
Earnings grow when there is sales growth or when the input costs come down including the interest costs, or with more efficient use of resources and increase in productivity. The most preferred way of earnings growth is growth in sales as that leads to multiple advantages and certainty in increase in earnings.
Growth in GDP has a direct correlation with growth in the Sensex companies. If the GDP doubles to $ 5.0 Trillion, Earnings and Sensex growth will follow at a similar rate if not at a higher rate.
The IMF in 2018 has projected a healthy GDP growth rate for India in the next five years.
The Global commodity cycle is currently moderate and with world growth slowing, going forward, commodities should remain in this zone.
Global interest rates are benign and the world capital is looking at avenues for an assured yield which India is well positioned to deliver. Hence if India can create the right environment to tap the Global capital, the badly needed investment in infrastructure of $ 1.4 Trillion over the next 5 years, as envisioned by Modi, will follow.
Read our earlier Blog on the Economic Agenda for the New Government. Read it to understand the steps the Govt needs to take to get into high single digit growth.
The government should continue its focus on fiscal consolidation and lower inflation. This will give the monetary policy committee more room to cut rate in response to slowdown in global macros, thus lowering interest rates for corporates and bring in private investment. We expect disposable income to increase in the coming years and it will also boost aspirational purchases and consumption growth.
As is evident from the above table, the magic $ 5 Trillion figure should be achieved in around 7 years. China & The US markets delivered great returns when their markets travelled the similar journey.
Read our earlier blog on “Chronological Lottery” – The art of Being invested at the right place, at the right time, in the right asset class.
Study of Stock market and Economic History shows that you can maximise your returns, if you invest during the most prosperous decades of the respective Economy. Where does India figure in this? Is India today on the cusp of a chronological lottery?
Read our earlier Blog to decide for yourself and provide us your feedback. https://www.sahayakassociates.in/resources/our-blog/2553-sahayak-associates/sahayak-associates-blog/8616-chronological-lottery
Sensex @ 80000 or Sensex @ 100000 in 2024, is dependent on earnings. It has delivered better returns in similar periods but has also delivered worse.
The Government understands what needs to be done, they have the political will to take strong decisions and unpleasant reforms, they have the vision and long term orientation and they understand that history will not present them with a better opportunity to deliver and raise the bar.
Forget the short term, the long term structural Indian bull market continues. Consult your investment advisor and get ready to join the equity journey and reap the benefits.
Stay Blessed Forever
Note: All information provided in this blog is for educational purposes only and does not constitute any professional advice or service. Readers are requested to consult a financial advisor before investing as investments are subject to Market Risks.
About The author
Sandeep is an alum of IIM Lucknow with a Post Graduate Degree (MBA class of 1988). His also an alum of Shri Ram College of Commerce, Delhi University (B.Com. Hons. Class of 1985.)
Sandeep’s investing experience and study of the Financial Markets spans over 30 years. He is based in Chandigarh and has been advising more than 500 clients across the globe on Financial Planning and Wealth Management.
He has promoted “Sahayak Gurukul” which is an attempt to share thoughts and knowledge on aspects related to Personal Finance and Wealth Management. Sahayak Gurukul provides financial insights into the markets, economy and Investments. Whether you are new to the personal finance domain or a professional looking to make your money work for you, the Sahayak Gurukul blogs and workshops are curated to demystify investing, simplify complex personal finance topics and help investors make better decisions about their money.
Alongside, Sandeep conducts regular Investor Awareness Programs and workshops for Training of Mutual Fund Distributors, and workshops and seminars on Financial Planning for Corporate groups, Teachers, Doctors and Other professionals.
Through his interactions and workshops, Sandeep works towards breaking the myths and illusions about money and finance.
He also writes a well read blog;
He has also conducted presentations, workshops and guest lectures at Management institutes for students on Financial Planning and Wealth Creation.
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