One of the major factors, driving optimism in the market, is the recovery in earnings growth along with the implementation of government reforms in Asia’s third largest economy which is growing at 7 percent rate, faster than most developed and EM economies.
When Sensex hit 20,000 back in 2007, the Street was anticipating a number of 30K on the index in a hurry, but nobody was aware of the global financial crisis that would hit equity market the very next year, which would take the index towards 10K in 2008, a fall of 50 percent.
Well, that’s market for you. It is the nature of the beast. There will be times when markets will be in depression and there will be times it would be in an extended state of euphoria.
It took 10 years for the S&P BSE Sensex to surpass 30K, although it had a touch and go moment back in the year 2015, but could not sustain the momentum and closed the year a little above 26,000.
The liquidity wave has taken most of the equity markets higher not just in India but across the globe. But, there are a lot of macro factors which are working in favor of India which may not be the case with respect to other emerging markets.
This is one big reason why analysts’ are so optimistic on markets in the year 2017 and see Sensex climbing near 50,000 or 45,000 by 2020, although periodic consolidation cannot be ruled out.
One of the major factors, which are driving optimism, is the recovery in earnings growth along with the implementation of government reforms in Asia’s third largest economy which is growing at 7 percent rate, faster than most developed and emerging market (EMs) economies.
The government now enjoys a considerable majority in Rajya Sabha especially after state election results which would ensure smooth passage of reforms.
“We are expecting 12-15 percent CAGR in Sensex EPS, which could take the overall EPS to 1,700 by FY18, 1,950 by FY19 and 2,250 by FY20. At the given forecasted numbers, Sensex could touch the levels of 34000 in FY18, 39000 in FY19 and 45,000 in FY20 at the trailing P/E of 20x, which is the moderate valuation for a growing economy like India,” Tushar Pendharkar, Head of Research, Right Horizons Investment Advisory Services told moneycontrol.
“We believe that most of the growth would come from Banking, Autos, Industrial Manufacturing, Infrastructure, FMCG and Consumer Durables. Pharma is expected to remain stable, while IT could face the heat in next 3 years,” he said.
The global demand environment is improving but factors like any disruptive policies from US President Donald Trump which would give rise to protectionism, rise in treasury yields, geopolitical tension along with likely depreciation of yuan by china could unsettle the global markets and tighten the liquidity tap which fuelled most of the rally in EMs along with Indian markets.
“The major risks are global in nature. Ant escalation in geo-political risks, worsening global economic outlook, and US interest rate scenario would affect our markets,” Prakarsh Gagdani, CEO, 5Paisa.com (a subsidiary of IIFL) told moneycontrol.
Although, most analysts are hesitant to put a timeframe as to when Sensex would be able to climb mount 50K, but as long as we see earnings recovery along with economic growth, investors will not be disappointed.
“Five years ago 30,000 number was something not easily assumable, however today we are there. Similarly 50,000 number achievable. But, instead of numbers, we must not look at the market in terms of its fundamentals, which seem pretty robust and the medium to long-term expectations are extremely positive,” said Gagdani of 5Paisa.com.
He further added that market is a slave of earnings. Therefore the valuation built-up based on earnings potential should materialize to sustain the rally.
Anand James, Chief Market Strategist at Geojit Financial Services said that it is difficult to put a time horizon for the 50K, but we are more likely to see 50K before seeing a significant breach of 25K on the Sensex.
Time will tell if we are able to reach 45,000 mark on the Sensex by 2020 but there is immense potential in individual stocks which can give over 50 percent return during the same period. Happy investing.