Sensex grew 390 times in 40 years!
Sensex is Celebrating its 40 Years, The journey started from April 1 1979, when we look back, its a sweet coincidence that the market has touched its all time high of 39000.
1 Lakh invested in Sensex in ’79 would have risen to 3.9 Cr Today.
When you calculate this journey with the return calculation, it has delivered a compounded annual growth rate (CAGR) of over 17 per cent. Sensex has risen a mind-numbing 390 times during these 40 years. 1st April 2019- The sensex touched its all time high of 39115.57 milestone during intra-day trading.
Its always easy to look back and say how this has happened, what’s more important is how the journey lies ahead for 2023?
What an investor can expect from Market in 2019?
Profit growth of Sensex/Nifty – Starting FY 08, profit growth in last 11 years has been hovering around 2-3% CAGR. In between we had few good years like FY 12, FY 14 etc. Beginning FY 18, we saw profit growth of 8% and FY 19 will close at 13-14% CAGR. Consensus for FY 20 is at 26% and for FY 21 at 15-16%.
Factors contributing this profit growth are as follows,
System liquidity so far has been tight on the back of default by companies like IL & FS. It has become difficult for the companies to raise capital and lots of NBFC companies were not in a position to lend.
NBFC Housing Finance companies combined lending book size is 20 lakh crores, which is as big as SBI and with the space being crisis hit, liquidity problems have come up.
US pause in rate hike – With US pausing its interest rate hike on the back of slowing economic growth (as shown by their Housing and infrastructure index which has hit lows for 5 consecutive years) lot of money has started to flow into emerging market economies like India. As we can see, FII flows have become positive in the year to begin with on the back of a stable rupee and strong fundamentals.
RBI dollar OMOs – RBI recently announced dollar OMO, wherein, instead of bond buy back, it had announced dollar buy back from bank in exchange of rupee to infuse liquidity into the banking system. This action was done to stem the volatility in INR-dollar exchange rate and also to support the banks in their lending operation. RBI received more than the targeted $5 billion dollars which signals more such dollar OMOs in future.
Bank interest rate scenario – In recent times, we have seen lot of private banks increase their deposit rates which had happened to bring a balance to their Asset liability mismatch. Credit growth was higher than deposit growth which pushed the banks to increase the rates. Going forward, with such OMOs, FII flows etc. we will see very good liquidity in the economy which augurs well for the capital market.
End Of NPA cycle
Most of the banks have already provisioned for their NPAs which means their profit margin will grow in the coming years. For example, SBI will report a profit of 7000 crores for the closing quarter with banks like ICICI and Axis following the pursuit.
These banks constitute 13-14% of the index and they are expected to deliver 100% profit growth in the next 2-3 years. Along with HDFC twins and other consumption companies also fuelling the growth, we can expect the Nifty/Sensex companies to deliver 15-16% profit growth.
Since FY 06-07, capacity utilization has crossed 80% levels and most of the companies are now looking at increasing capex.
With higher import duty being slapped on white goods like refrigerator, air conditioner etc, demand to produce in India will go up resulting in higher job creation, salary growth and improved profitability levels for the companies.
Factors which can challenge the growth
Most of the state governments are running high on deficits which mean that the capex growth, in terms of roads and other infrastructure development will be slow.
With this being an election year and with a slurry of subsidies higher level of fiscal slippages are expected.
GDP growth in India going forward will be in range of 6-8% backed by low inflation and low interest rate.
Midcaps and small caps have corrected 25% and 35% respectively so far with more room for correction in midcap space. Small cap looks attractive at this point in time with respect to the valuations and also the profitability of quality companies poised to grow at 25-30%. Overall, with valuations being attractive coupled with increasing liquidity in the economy, the short to medium term outlook (3-5 yrs) looks very positive for the equity market. Investors can look to incrementally add money in small cap funds, Multi cap funds, large and midcap funds and midcap funds in that order.
But always consult with your Wealth / Financial Consultant before you make your investment.
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