Sensex@record high: Why it can hit 40,000 in five years, and India sit on top

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Can Sensex hit 40,000 in the next five years?

One can find five reasons to negate or confirm the same, but going by what top brokerages and experts say the foresight does not look like an impossibility.

"Surely, there is a possibility of the index hitting 40,000 in the next five years as the stock markets have underperformed other asset classes like gold, real estate and even fixed deposits," says technical analyst Salil Sharma.

"Technically, when the levels of 6,300 on Nifty and 21,500 on Sensex were broken, it was a critical breakout on the charts forming an ascending triangle, which is a bullish sign in the long run," he explains.

Gajendra Nagpal, founder & CEO, Augment Financial Services, fully agrees: "Yes, it is likely that the Sensex can hit 40,000 in the next five years; and I strongly believe that there will be an unprecedented rise in Indian equities."

"Traditionally, IT, pharma and FMCG have been doing well, and the story is intact. Going ahead, sectors like infrastructure, real estate and financials and cap goods, which have been underperformers, if they become market performers then certaintly Sensex can scale 40,000 levels."

Raamdeo Agrawal of Motilal Oswal Financial ServicesBSE -5.69 %, told ET Now last week that "the probability is very, very high that in the next five years, forget individual stocks, you will see Nifty going to say 12,000-13,000 levels."

Generally, it is seen that Sensex level is three times that of Nifty. If Nifty will be at 13,000 in the next five years, then approximate Sensex level could be around 39,000-40,000.

Today, the markets made fresh record high, with Sensex surging over 300 points in intraday trade to hit its new all-time high of 22074.34; and Nifty rising over 100 points to make its life high of 6,591.50.

The stock markets have been on a high since some time now, especially after the results to assembly elections were announced December last year.

Coming to if Sensex can hit 40,000 in the next five years. Well, in the past 20 years, the Sensex has soared from 2,000 levels to around 22,000 levels.

This translates into a gain of 20,000 points in 20 years.

Also, the country's equity market capitalization has gone up from $70 billion to $940 billion, a 17% CAGR, in the past 20 years, as per a Morgan Stanley report.

"If there is an NDA regime, we could see a two-three years of bull market. Investors can expect a 15% CAGR for the next 2-3 years under this scenario," says Rajesh Iyer of Kotak Wealth Management.

Talking about last five years, that is from 2009 to 2014, the 30-stock index has gained from around 10,000 levels to 22,000.

From 2004 to late 2007, the Sensex soared from 5,000 levels to 20,000 levels; which means that in the three years the index gained four times.

Given this history, Sensex at 40,000 in the next five years does not seem far-fetched.

A large part of the Sensex rally is said to have happened on the back of improving economic situation in India. On the macro front, India's GDP has risen from $260 billion to $1,842 billion in the last 20 years.

The country's foreign exchange reserves are continuing the uptrend, expanding by $1.838 billion to $297.28 billion in the week ended March 7, thanks to a rise in currency assets.

The reserves are now nearing $300 billion levels.

Last week, Goldman Sachs upgraded India to 'overweight', setting an aggressive target of 7,600 for Nifty in the next 12 months, which implies a 17% upside from current levels.

India on top? Economic predictions

London-based economic consultancy Centre for Economics and Business Research (CEBR) has predicted in a report released in December 2013 that India is likely to overtake Japan in 2028 to become the third largest economy, after China and the US.

By 2018, the emerging economies will be "on the move". Russia would be at the 6th place; India 9th, Mexico 12th, Korea 13th and Turkey 17th, the report said.

"By 2023, India and Brazil would be "on the march" and are likely to claim the 4th and 5th place, respectively."

"By 2028, the league table will be reordered. China will move to the number one place, followed by the United States (2nd), India (3rd), Mexico (9th) and Canada (10th)."

Going a step ahead, back in 2011, a report published by PwC, had said that India is poised to overtake the US and emerge as the World's second largest economy on purchasing power parity basis by 2050, adding that India has the potential to supersede China to the top spot.

The report noted that India's trend growth is likely expected to overtake China at some point due to the country having a significantly younger and faster growing working age population.

"India is expected to achieve the most significant increases in share of the world GDP at Market Exchange Rates (MERs) by 2050. In 2009, India's share of world GDP at MERs was just 2 per cent. By 2050, this share could grow to around 13 per cent," the report said.

Talking about the present state of economy, brokerages see India at the cusp of an economic surge.

"We believe the election will be a seminal moment in India's economic history, and equities will prosper as a result," RBS said in a report released last week.

"A change of leadership and ensuing policy changes could revive the Indian economy in a similar vein to Japan and China in recent years," it said.

It's not just RBS that's going gung-ho over India's economic prospects.

Earlier this month, economictimes.com had listed the major factors that may well work to improving India's growth prospects. We list them for you again:

Sharp narrowing in CAD: CAD has fallen to its lowest in eight years due to government-imposed curbs on gold imports and as the RBI's subsidy for non-resident Indians' US dollar deposits boosted capital flows.

The December quarter CAD, the excess of spending overseas than earnings, fell to 0.9% of the gross domestic product, from 6.5% a year earlier. For the April-December period, it was 2.3% of the GDP, down from 5.2% the same period earlier, data from the RBI showed.

Data from RBI indicates that CAD amounted to $4.2 billion in the December quarter, from $31.9 billion a year ago.

"India has come a long way in terms of reducing its external vulnerabilities. A drop in the current account deficit from 6.5 per cent of GDP in Oct-Dec 2012 to just 0.9 per cent a year later is quite an achievement and testament to the concerted efforts of the RBI and the government to rein in the deficit," HSBC said in a report.

The global investment bank is of the view that policy makers still have to walk the straight-and-narrow when it comes to monetary, fiscal, and structural policies to make sure that the deficit remains contained and of higher quality.

"India has come a long way in terms of reducing its external vulnerabilities. A drop in the current account deficit from 6.5 per cent of GDP in October-December 2012 to just 0.9 per cent a year later is quite an achievement and testament to the concerted efforts of the RBI and the government to rein in the deficit," HSBC said in a report.

BNP Paribas Corporate & Investment Banking, in its note has said, "The continued improvement in the goods trade deficit suggests a current account surplus is possible in Q4, leaving the full-year FY2014 deficit on course to reach close to $30 billion or 1.6% of GDP, against the government's target of $45 billion and a $88 billion shortfall in FY2013."

Rupee: At a time when emerging market currencies are volatile in the light of growing fears of further tapering by the US Federal Reserve, the rupee has managed to hold its ground and has remained largely stable.

The currency has been the top performer amongst its emerging market (EMs) peers since early-September 2013. The currency has moved in a narrow band of 61-63 per US Dollar so far in 2014.

"The conviction in the rupee strengthening is widening. With news of election and exit polls showing a strong performance for the opposition, the chances of a stable government coming in are rising. I expect more flows to come in," said Subramanian Sharma, director at Greenback Forex.

BNP Paribas Corporate & Investment Banking, in its note has said, "The rupee has proved resilient against US dollar to date. The real test of it's stability, however, will be when administrative restrictions on gold imports, which appear to have lowered gold flows by over 2% of GDP annualised, are lifted."

Improving macro factors: The near-term PMI readings suggest there may be some pickup in manufacturing activity in the final quarter of the fiscal. Once a stable government comes to power, there are chances of growth activity shooting up.

"We currently forecast GDP growth to come in at 5.3 per cent next fiscal year, but that assumes that the necessary macroeconomic adjustment and structural policy measures are introduced without undue delays. Whether that will happen or not depends importantly on the upcoming elections and the extent to which the elected government gets a clear mandate, which at this stage is far from given," said HSBC report.

The WPI and CPI inflation have dipped by more than 100bps M-o-M. WPI inflation eased sharply to 5.1 per cent in January 14 vs 6.2 per cent in December 13 and CPI inflation eased to 8.8 per cent vs. 9.9 per cent earlier.

There are chances that the downtrend will continue and provide some room for the RBI to cut interest rates.

General elections: Consecutive FII buying in the cash market and bullish bets on Nifty index futures.

FII holding in Sensex companies is at an eight-year high of 26.2%, Bank of America-Merrill Lynch said in a report on Wednesday. In the broader BSE 200 index, FIIs' stake is at an alltime high of 23.5%.

"Recent FIIs flows have been fairly strong which indicate a decent rally ahead of elections," said Nilesh Shah, MD & CEO, Axis Capital. "We never expected this kind of flows from FIIs in this environment."

According to market experts, FIIs are banking on a stable government post elections. Recent opinion polls suggest that Narendra Modi-led BJP will secure over 200 seats on its own in the elections and the markets are happy about it. Modi has been the blue-eyed boy for the foreign institutional investors because of his said market-friendly approach.

Conviction that economy has bottomed out: Not with standing economic factors, what works for any economy is also the perception of investors. Most economists are of the consensus notion, that the worst is over for the Indian economy, and the parameters are in fact reflective of green shoots emerging.

"There is much greater faith in the way the Indian economy is being run now compared to many other emerging markets. Increasingly clear that the Indian economy is bottoming out, the macro imbalances around inflation, around CAD are gradually coming back into some sort of control," said Saurabh Mukherjea, CEO, Institutional Equities, Ambit Capital.

"FIIs have realised that macro governance in India both at the central bank level and at the Finance Ministry level is at a different standard compared to most other emerging markets," said added Mukherjea.

The latest GDP figures also suggest that demand is picking up economy-wide. Note also that private consumption expenditure is on the uptick, and the segment of "Trade, hotels, transport and communications" has posted rising growth all along this fiscal.

Farm growth in Q3 at 3.6% is lower than that in Q2, but what is more notable is that horticulture (read fruit and vegetables) is expected to notch a smart 4.1% growth this fiscal year (over the like period last year).

Artcle taken from ET: http://economictimes.indiatimes.com...a-sit-on-top/articleshow/32592529.cms?curpg=4
 

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