The markets are soaring to new heights. The Sensex closed at 80,049.67 on July 4 rebounding strongly after recent uncertainty surrounding the elections. The index has surpassed year-end targets set by numerous brokerage firms. Leading investors project the Sensex to potentially reach the 1 lakh mark within the next three to five years. Billionaire investor Mark Mobius expressed confidence in India’s bullish market, suggesting the Sensex could even breach 1 lakh before the end of Prime Minister Modi’s third term.
The Sensex jumped from 70,000 to 80,000 in less than seven months. Since its inception at 100 in April 1979, it has grown by an impressive 15.9% annually, expanding 800-fold. Doubling from 1,000 to 2,000 points took 1.48 years, and further to 4,000 points in just 0.21 years by March 1992.
It then took 6.33 years to double from 5,000 to 10,000 points in February 2006. Subsequently, it doubled again to 20,000 points in 1.84 years, and to 40,000 points in 11.45 years by May 2019. From 40,000 to 80,000, the journey spanned five years and 1.5 months. On an average, the benchmark index doubled in a little over five years.
With a historical CAGR of 16%, achieving the 1 lakh milestone by December 2025 seems optimistic yet feasible, if sustained growth continues. However, maintaining such high returns from a higher base could prove challenging.
Despite the Sensex more than tripling since its March 2020 lows, optimism remains tempered by potential market volatility ahead. Along the path to 1 lakh, three key indicators emerge as crucial:
Historical Doubling Periods: While past performance isn’t indicative of future outcomes, Sensex’s quickest doubling – from 2,000 to 4,000 points – took just 2.5 months in 1992. Conversely, its longest doubling period was from 2007 to 2019, taking about 11.5 years to jump from 20,000 to 40,000 points. The index reached 50,000 points in January 2021, suggesting a historical doubling period of approximately five years, potentially placing 1 lakh within reach by January 2026.
Sensex Returns And GDP Growth
In nominal terms (before adjusting for inflation), Sensex has delivered a compounded annual growth rate of close to 16% since its inception in 1979, over the past 45 years. This growth rate is comparable to the nominal GDP growth of the Indian economy over the same period.
The economy is projected to grow at 6.5%-7% over the next three years as India becomes the third-largest economy. Assuming a nominal return of 7% annually for the next three and a half years, the Sensex could reach a value of around 1 lakh by December 2027.
Market Cap to GDP Ratio
As of March 2024, the market cap to GDP ratio stood at 135%. Over the past 20 years, the average ratio has been above 83%, suggesting that current market valuations may be relatively high compared to the 20-year historical average. Interestingly, the Indian stock market hit a bottom around the same ratio in 2020 following COVID-19, as it did in March 2009 after the Global Financial Crisis, at 53%-55%.
Implications Of A Market Correction
Many analysts believe the markets are overheated, citing the high market cap to GDP ratio, and anticipate an imminent correction. The exact timing and extent of this correction are difficult to predict accurately.
If there is a correction of 10% from current levels, achieving an annual return of 12% would be necessary to reach the target of 1 lakh by 2027. In the case of a 20% correction, a return of 16% per year would be required. Both 12% and 16% annual returns are considered ambitious given the large base effect.
If a correction of 10%-20% occurs, the 1 lakh milestone might be achieved by 2029, aligning with the conclusion of Modi’s third term. However, if no correction occurs, Sensex appears to be on track to reach the target by 2027.
(Amitabh Tiwari is a political strategist and commentator. In his earlier avatar, he was a corporate and investment banker.)
Disclaimer: These are the personal opinions of the author