MUMBAI: The Sensex breaching all-time highs has become passé. Friday was another day it did so, ending at 14,403.77.
Analysts have already started talking about 15,000 levels for the index in the next few weeks, but here’s one report that takes a long enough view where the Sensex hits 50K - yes, 50,000.
According to a JM Morgan Stanley report dated January 31, 2007, “the Sensex could take almost 13 years to breach 50,000 from its current level”.
Before jumping over the moon, investors should know that the 50K projected over the next 13 years would merely mean the index would be rising at a bit more than 10% annually. Some banks already offer interest rates of 9-9.5% for fixed deposits.
The Morgan Stanley report says that this kind of return may not be a source of comfort since it “may not be able to compensate investors for the risks involved in investing in India.
However, this return appears consistent with the current low levels of risk appetite still making Indian equities attractive in the context of current high levels of risk love”.
Ridham Desai and Kuleen Tanna, who authored report, feel that for investors to be compensated with the risk-return premium they deserve, the Sensex should grow at a compounded annual growth rate of 14%, rather than just a tad over 10%.
If this has to happen, critical success factors like GDP growth, interest rates, inflation rate and the success of India’s infrastructure rollout should have to exceed the research house’s most bullish assumptions over the coming years. A growth rate of 13.5% would assume that the Sensex would touch 50,000 in 10 years.
Put in context, these numbers pale in comparison to the 42.33% growth delivered by the index in 2005 and 46.70% in 2006.
And “if things turn bad, returns could shrink to an annual rate of 8.6%, implying that it would require more than 15 years for the BSE Sensex to reach 50,000,” says the report. This would be just a bit better than the yield offered by long-term government bonds.
The report also says less obvious factors like global risk appetite, the pace at which Indian companies globalise, the rate of wage increases, the investment rate, the estimated asset life in the books of accounts and capital structure alterations will also play a role in determining how the benchmark index would grow.
