With the formation of the new Government bulls are back on Dalal Street with vengeance, and the Sensex and Nifty have been scaling new peaks day after day. Fund Managers and Foreign brokerages are busy making new predictions about the Sensex. Some are suggesting Sensex moving towards 30,000, 50,000 and 1,00,000, leaving retail investors amused as well as confused. It would be worthwhile to track the history of the Sensex to help us understand the returns that could be made from equity investment in India.
The BSE Sensex was formally launched in 1986, with the base as 100 in 1979. In fact the actual recorded value of the Sensex was 124.15 on April 3, 1979. History of the Sensex suggests that the Sensex has been doubling itself every 4-5 years in its 35 years of existence. Please view the table below for the Sensex performance till date:
Year Projected Level Actual Level Corresponding Nifty Level
1979 125 (base level) 124.15 -
1983 250 212 -
1987 500 510 -
1991 1000 1168 -
1995 2000 3261 990 (base 1000 on 3.11.95)
2000 4000 5001 1528
2005 8000 6493 2035
2010 16000 17528 5249
2012 20200 17404 5295
2014 25500 22386 6704
2016 32000 ? ?
2021 64000 ? ?
BSE Sensex was launched in 1986 when equity cult was virtually non-existent in India. Dhirubhai Ambani was a pioneer in promoting the equity cult amongst Indian investors with the Public offering of his flagship company Reliance Industries. Equity investment received a big fillip when the Narasimha Rao Govt. unleashed a series of liberalisation measures in 1991 paving the way for huge investments by Foreign investors in India.
1. 1979-1995: During the first few years of the Sensex from 1979-1995, Indian economy was in an underdeveloped stage and a catch up rally in the markets was evident as India was trying to catch up with the developing economies. Inflation rate shot up to over 10% in the first few years of the liberalised environment, as administered pricing mechanism crumbled. Inflation averaged a high 10.6% in the period 1992-1996. I have assumed an average compounded growth of around 19% pa during this period, leading to doubling of the Sensex every 4 years.
2. 1995-2010: By the middle of 1990's India had joined the club of emerging markets known as BRICS. Inflation started to moderate and Indian economy was put on a high growth path. Sensex growth which was tepid till 2004-05, gained momentum under UPA I led by Manmohan Singh. Singh started his second term with a bang but growth momentum slipped under UPA II due to policy paralysis. Inflation averaged a moderate 5.4% during the decade 2000-2010. I have assumed an average compounded growth rate of 15-15.5% for this period, leading to doubling of the Sensex every 5 years.
3. 2010-2021: The Sensex virtually went into slumber after recording the highs of 21000 in January 2008, and eager investors had to wait for over 5 years for Sensex to decisively go past the crucial 21000 barrier. This resulted in the Sensex slipping below the long term trend line. As India continues to be an emerging market it would be safe to assume a return of 15% plus for the current decade also, leading to the Sensex doubling in 5 years. However, due to the policy paralysis during the last 2 years of UPA regime I have chopped off one year from the decade, leading to the doubling of Sensex in 6 years between 2010-2016. However, with the growth momentum returning back after installation of a strong Govt. it could again double in the next 5 years to 2021. Based on this simple analogy, I expect the Sensex to be at 32000 by 2016 and 64000 by 2021. The corresponding levels of Nifty would be 9500 and 19000 respectively.
Ironically, the Sensex movement does not give weightage to the dividends declared by companies. Currently, the Sensex companies have a dividend yield of around 1.4%, which is over and above the Sensex/ Nifty absolute numbers. So if equity investment is giving you an annualised return of 17% (including dividend) why look elsewhere. The other competing investment avenues like Real estate and Gold would now take a breather and bank deposit rates would move southwards. As growth returns in Indian economy, equity investment would give better inflation adjusted returns as compared to other asset classes. However, there would be hiccups in the upward journey, which should be used at entry points to invest in equity market for long term. Levels of 21000 on the Sensex and 6350 on Nifty are now going to serve as a solid base in this upward journey.
3. 2010-2021: The Sensex virtually went into slumber after recording the highs of 21000 in January 2008, and eager investors had to wait for over 5 years for Sensex to decisively go past the crucial 21000 barrier. This resulted in the Sensex slipping below the long term trend line. As India continues to be an emerging market it would be safe to assume a return of 15% plus for the current decade also, leading to the Sensex doubling in 5 years. However, due to the policy paralysis during the last 2 years of UPA regime I have chopped off one year from the decade, leading to the doubling of Sensex in 6 years between 2010-2016. However, with the growth momentum returning back after installation of a strong Govt. it could again double in the next 5 years to 2021. Based on this simple analogy, I expect the Sensex to be at 32000 by 2016 and 64000 by 2021. The corresponding levels of Nifty would be 9500 and 19000 respectively.
Ironically, the Sensex movement does not give weightage to the dividends declared by companies. Currently, the Sensex companies have a dividend yield of around 1.4%, which is over and above the Sensex/ Nifty absolute numbers. So if equity investment is giving you an annualised return of 17% (including dividend) why look elsewhere. The other competing investment avenues like Real estate and Gold would now take a breather and bank deposit rates would move southwards. As growth returns in Indian economy, equity investment would give better inflation adjusted returns as compared to other asset classes. However, there would be hiccups in the upward journey, which should be used at entry points to invest in equity market for long term. Levels of 21000 on the Sensex and 6350 on Nifty are now going to serve as a solid base in this upward journey.
