(This article was first published on 05-06-2014)
KARVY Stock Brokings which has been recently barred by market regulator SEBI, from taking up new assignment or launching new schemes for six months in respect of its role as a stockbroker, has come out with a research report wherein it says that Sensex will touch 1,00,000 mark by 2020.
KARVY has 5 reasons why Sensex will touch that magic figure.
First: Macro-economic revival in India will open opportunities to make strong returns in the next few years.
Second: A real GDP growth of 6% along with Inflation of around 7% should lead to a nominal GDP growth of 13%.
Third: KARVY believes that earnings growth for new five to six year business cycle should be at least 20% considering the economy will revive from a very low base.
Fourth: If the infrastructure cycle revives quickly, the earnings growth revival will be faster with even 25% CAGR looking possible.
Fifth: An earnings growth between 20-25% and multiple re rating from 15x to 16-17x in the next few years can lead to a 25% compounding of Sensex returns, which will take it to 100,000 levels by calendar year (CY) 2020.
What KARVY has not factored in are:
1. Happening of a 'Black Swan' event - like the one occurred in 2008 which led to global meltdown. A sub prime crisis. Prior to the global meltdown in 2008, Sensex was hovering around 22,000 and experts like KARVY then predicted that Sensex will touch 50,000 mark by 2014. Believing this theory millions of investors jumped in to the market. Then came the meltdown. Equity markets across the world plummeted. Within few months Sensex came down to 8000 levels. Most investors lost money, some went bankrupt, few committed suicide. Brokerage houses down sized their operations. It took nearly 6 years for Sensex to come to the level of 2008. Between June 2008 and June 2014, in full 6 years, the Sensex has moved by just by 3000 points.
2. Monsoon failure - This will apart from deterrent to GDP will be a drag on some segments like FMCG, auto and banks.
3. Fluctuations in currencies of major economies which will hinder our import / export.
4. Regime change / change in the economic policies in countries where in India is a major trading partner. 2016 is a big year for world economy. U S will elect its new president. The incumbent may be not as friendly as the current one.
5. Slow down in world's major economies like U S A, China and Japan will have an impact on India's growth story.
6. Terror strike similar to 29/11 which will make the world economy crawl.
7. Spurt in oil prices internationally, reasons other than production and supply. We import 80% of oil requirements. If oil prices in international markets raises unreasonably as it happened in 2008-09, where in one barrel had touched $ 150, our economy will go for a tailspin.
8. Nature's fury - floods, earth quake and tsunamis. Capital earmarked for development will be diverted towards rehabilitation, will impact growth.
9. Scams, fraud in stock market - similar to one committed by Harshad Mehta and Ketan Parekh. Investors will lose faith in the system, market. We shall be back to square one.
10. Failure of a big bank / financial institution, globally. Money will flow away from equity markets to commodity / other segments.
( KARVY made the above prediction in first week of June, 2014. The sensex was hovering around 25,500 at that time).
Sensex has gained 5200 points in the last 40 months.
