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Tuesday, March 8, 2011

Economy v/s Sensex


Our economy/GDP touched a 1 Trillion mark in Nov 2007. We will become a 2 Trillion economy in next 19 months. This will be a phenomenal growth because many would not have expected us to touch 2 trillion so early. We are in the elite club of a trillion and GDP size-wise are amongst the top 10 nations in the world. If we continue to grow at 9% per annum then we will become a 5trillion economy by 2023. However, if due to some unforeseen reasons the growth rate comes down and we manage to achieve an average growth rate of 7% YoY then the 5 trillion economy number will come by 2025. (and we are not talking about several sound initiatives which will be required to consistently achieve a growth rate of 7-9% YoY for next 12-15 years).

The GDP to M-CAP is equal or 0.90% of GDP in fair market scenario. Presently the Sensex is at 18000 levels and the size of the economy (nominal) is 1.43 trillion (as of today will be more than 1.43 trillion). If the economy reaches to 5 trillion then the Sensex number should reach anywhere between 50,000-60,000. Looks ambitious but still very much possible...:-)

This scenario is especially important to bring the importance of long term investment v/s short term gains(?).

Views are welcome.

p.s.: I have taken an average 7% growth of the GDP (the government is expecting a GDP growth rate of around 9% but I am taking an average 7% since we might have some period when it might not grow that fast). If the GDP growth rate of 7% is achieved then the GDP will reach to 5Tn by 2025 from present 1.4 trillion (if the growth is 9% then 5 trillion it will be by 2023).

Normally, the GDP to market cap figure is 1 or 0.9, in normal circumstances. Our present market cap is around 1.20 trillion and the GDP is 1.4trillion (a ratio of close to 0.85). When the Sensex was at 21000 the market cap was 1.36 Trillion and the ratio between Market cap and GDP was 0.97. With the same corollary the Market cap will be close to 4.5-5 Trillion by 2023/2025, an increase by 4 times at least. So the Sensex will reflect that accordingly and may see a figure of 75000, I am being conservative putting a number of 50-60k to Sensex.

Niteen S Dharmawat

IMPORTANT DISCLAIMER: Investment in equity shares has its own risks. Sincere efforts have been made to present the right investment perspective. The information contained herein is based on analysis and up on sources that I consider reliable. I, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and I am not responsible for any loss incurred based upon it & take no responsibility whatsoever for any financial profits or loss which may arise from the recommendations above. I sincerely request you to do your homework before you take any position whatsoever.

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