The markets have registered the highest post-Budget increase in a decade with Sensex closing at 52,216.23 on February 15, 2021.
The Sensex has already breached the year-end targets of most brokerages. Billionaire investor Rakesh Jhunjhunwala has said that the ‘biggest bull run of India’ is not far away, but is ongoing at the very moment. Amar Ambani of YES Securities has predicted that Sensex could hit the 100,000 mark by 2025.
A host of factors lend credible support to the up market cycle - liquidity, global stimulus resulting in seamless capital flow to emerging markets, low interest rates, low inflation and USD’s sideways or downward direction.
When the markets have almost doubled from the lows of March 2020, this sort of exuberance is not unwarranted. The journey could be volatile though and not as smooth.
1. Historical doubling period
History doesn’t repeat itself, but it often rhymes, as the saying goes. The fastest doubling of the Sensex took place during 1992 when the index jumped from 2,000 to 4,000 points in 2.5 months.
The longest doubling period has been from 2007 to 2019 when the Sensex jumped from 20,000 to 40,000 points in about 11.5 years.
Doubling of Sensex - Time taken in years
The average doubling period is little over 5 years in this example. So to assume Sensex doubling to 100,000 in another 10 years is not impractical.
2. Historical returns and correlation with GDP growth
In nominal terms, the Sensex has delivered a compounded annual growth rate of cose to 17% since its inception in 1979. This number is close to the nominal GDP growth of the Indian economy over this period, especially of the manufacturing and service sectors.
A nominal return of just 7% every year for the next ten years, which is less than half of the historical return posted by the index, gives us a Sensex value of around 1 lakh by 2030.
3. Market cap to GDP ratio
The market cap to GDP ratio touched an all-time high of 157% in Dec 2007. Currently, it is over 100%. The average ratio has been over 80% in the last 15 years.
At a nominal GDP growth estimate of just over 10% as per Deutsche Bank over the next decade, the historical Market Cap to GDP ratio indicates that the market could double by 2030.
What happens if market crashes from these levels
The markets are overheated as per many analysts and a crash is imminent. The timing and the quantum of crash nobody can predict accurately.
The table below shows different scenarios of quantum of crash and the return required per year in the next decade from the Sensex to reach the magical figure of 100,000 by 2030.
The analysis shows that even if the market crashes by 50% to 25,500 levels, it needs to deliver a CAGR return of 15% to reach 1 lakh by 2030. This is lower than the Sensex historical return of 17% per year.
Quantum of crash and Return required to reach 1 lakh mark
Given the lower GDP growth estimated (10%) in the next decade, this may, however, not be achievable.
However, if the Sensex crashes by up to 20% from current levels, there is a good enough chance that it can still reach the 100,000 mark by 2030 as it would require a CAGR return of 10% which is similar to the economic growth projected.
To sum up, a host of indicators suggest that the Sensex may well double by 2030.