Back in 1796, Robert Southey wrote a famous poem “After Blenheim” about a conversation between a grandfather and his grandson on the site of the War of Blenheim. The grandson is absolutely unsure about the benefits of such a war but the grandfather continues to hold that it, “Twas a famous victory”.
Circa 2021 and you can juxtapose it to the modern day markets. One thing we can surely say about the Sensex is that “Twas a famous journey”. Modern day sceptics may question the benefits of such a lofty Sensex but for those have seen the vagaries of the market over the years; Sensex at 50,000 offers a tinge of nostalgia and a sense of fulfilment.
Sensex – the famous journey so far
Data Source: BSE (13 Jan CMP as at 10.30 am)
The Sensex is yet to officially scale 50,000 but it is just about 300 points away. Hopefully, that should happen sooner rather than later, but that is off the point. What really matters is that the Sensex has seen a fantastic journey between 1979 and 2021.
Over a 42 year period, the Sensex has grown almost 500-fold from 100 in 1979 to almost 50,000 in 2021. That is a compounded annual growth rate of 15.95% over the last 42 years. Here we are not considering the dividends and if you add the dividend yield of over 1.5% annualized, we are talking about annualized returns of 17.5% on the Sensex. This is not one or two years, but compounded returns over a 42 year period. There is perhaps no better manifestation of the potential of the Indian economy.
Key milestones in the life of the Sensex
It is interesting to see how the Sensex traversed the journey of each 10,000 points over the last 42 years. The first time the level of 10,000 was scaled was in Feb-2006, a full 27 years after the inception of the Sensex. However, the journey from 10,000 to 20,000 happened in less than 23 months as the Sensex scaled that level by Jan-2008. However, the journey from 20,000 to 30,000 took a full 9 years and 4 months as the sub-prime crisis and the cascading of the European economies resulted in a prolonged lull in the markets.
The journey from 30,000 to 40,000 was much quicker and was covered in just about 2 years and 6 months. The last part of the journey has perhaps been the most fascinating. It is not just that the journey from 40,000 to nearly 50,000 was achieved in less than 14 months. The bigger story is that this journey was achieved in 14 months despite a vertical 30% correction in the Sensex due to the COVID pandemic.
Here is a small quiz. Did you know which period generated the best compounded returns? The best period was the structural bull rally between 2003 and 2008 when the Sensex returns a whopping 44.82% CAGR during the 5-year period before imploding in the sub-prime fiasco. Following behind that is the 12-year rally between 1979 and late 1991. During this period, the Sensex earned an impressive 36.77% over a period of 12 years. Of course, this rally ended with the infamous Harshad Mehta scam.
What is still driving the Sensex higher?
Will the rally continue; appears to be the million dollar question. That is hard to predict, but a number of factors have favoured the index. Firstly, FPIs have infused Rs150,000cr into Indian equities in the last 75 days and that is unprecedented. Secondly, there is hope of a reformist budget that is likely to spur GDP growth in FY22.
Lastly, investors appear to be confident that the problems of the financial sector may be largely overstated and may not really impact the asset quality of banks. Above all, with debt yields so low and real estate uncertain, the big question for investors is what do they exit equities and do?
Are there risks to Sensex at 50,000?
One can argue that 50,000 is just a number, which is correct. But we cannot underestimate the role of such psychological levels. There are two distinct risks. Firstly, the index P/E has touched 40X, which is historically the highest level ever. That would raise concerns among institutional investors, especially when they have cheaper alternatives.
Secondly, this is a liquidity driven bull market and the RBI reverse repo issue worth Rs2 trillion is the first indication that government and RBI are not comfortable with asset price levels. Any liquidity reversal could be a big risk for the markets at these levels.