It is a question that nobody — I repeat, nobody — can answer. Not in this country. Not in the US, the EU, China. And yet, every time the market hovers near its peak, as was the case on Wednesday (the Sensex is 331 points or 1.6% short of its all-time January 10, 2008, high of 21,206.8 points), the question on top of investors' minds is: where is the Sensex headed tomorrow, the next week, next month?
The short answer: nobody knows — and nobody has ever known. It is one thing to talk in a jargon-laced and legally-hedged language about fundamentals, technicals or momentum on TV. It is quite another to predict the market accurately. Had the business of prediction been as simple as the alleged "experts" make it out to be, they would be buying islands, not waiting for their consultancy fees. Having said that, predicting the long-term India story is not so difficult anymore. The 1991 economic reforms, initiated by then Prime Minister Narasimha Rao through then finance minister and now Prime Minister Manmohan Singh, are finally, after much wrestling with the entrenched, showering their fruits. According to estimates by think tanks and multilateral institutions the world over, India, already the fastest-growing large economy after China, will become the world's fastest-growing in a few years.
The implication of this growth is not appreciated completely. If the Indian economy grows at 8.5% per annum for 10 years, it would add up to growth of nearly $1.5 trillion (or India's projected GDP in 2013). It is clear that this growth will be driven by private companies, most of which will be listed on the stock exchanges, the largest of which will join the Sensex. These companies, however, will not be growing at 8.5% but probably at 25-40% (GDP is held back by low agricultural productivity).
To return to the market, if a company grows at 25% every year, it is not very difficult to presume that its stock will mirror or better that growth. Let's for a moment forget that the market has shot up by 38% over the past year and look beyond such dangerous short-term numbers that seem to have overwhelmed most commentators. Over the past five years, the Sensex has risen at a compound annual growth rate (CAGR) of 21%. The last 10 years have seen it rise by 18%. In fact, barring 1995, when it rose by just 13%, the growth of the Sensex has been nothing short of spectacular.
If you translate these numbers into rupees, an investment of Rs 1 lakh in the Sensex in 1990 would be worth Rs 15.9 lakh today. The same investment made in 1980 would have grown into Rs 1.6 crore. Those who think "you can't go wrong with property" need to view the real estate investment through the similar prism of time. Those of you in your 20s or even 30s will speak in the same way about stock markets, but with far greater enthusiasm.
One, the long-term India growth story has barely begun. With so much of infrastructure still to be built — roads, ports, airports, power plants, urban development, water management and so on — the country can easily expect large capital inflows to finance these mega-projects. These will provide the first flush of growth. "FII inflows continue to be strong on back of good results," said ICICI Securities executive director Anup Bagchi. "India remains one of the few countries with broad based economic activity with high GDP growth. That attracts capital."
Two, once these projects are up and running, secondary industries like automobiles, housing, fast-moving consumer goods, consumer durables and so on will begin to ride this infrastructure and bring in greater efficiencies into the distribution systems. Three, people working on these jobs will pull in the demand for products and as the ongoing consumer boom mushrooms into smaller towns and villages, companies making these products will benefit. As will retailers.
Four, financing these products will be the banking industry, which will lend to consumers, particularly of real estate but equally of consumer durables and the vacation industry. They will be betting on the ability of average citizens to work the next 10 years and return the money in EMIs.
Five, the services boom will continue to drive growth, as a demographically-advantaged nation becomes the world's servicing industry through call centres, nursing care — and even financial services if Mumbai is allowed to become a global financial centre. The net result: a Sensex that will only grow. Although past performance is no guarantee for future returns, I would forecast the Sensex to grow at 18% per annum for the next 25 years. Which means, it will be close to 50,000 in 2015 and will cross 100,000 in 2020. Of course, there will be periods of stagnancy in the middle, as one crisis after another hits us — financial, terror, internal security, governance and so on.
"You can't take this growth for granted," finance minister Pranab Mukherjee told Hindustan Times last month. He's right. A lot can go wrong on the way. But I believe the inner aspirations of India are now very clear, and all impediments to its growth story will slowly, perhaps too slowly for aggressive reformers, be smoothened out. Perhaps it is because there's so much to do that there's so much growth to expect.
Given the kind of growth expectations ahead, I see no reason why the Sensex should not deliver returns that would be among the world's best markets. But do not expect the rise to be a straight line. There will be falls along the way. That's the nature of the beast. Ride it you must, but saddle up for kicks, bucks and bruises.