Wise Wealth Advisors

D.Muthukrishnan (Muthu), Certified Financial Planner- Personal Financial Advisor

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Points to ponder

Posted by Muthu on March 9, 2014

Sensex is a basket of 30 companies. Each company has yearly earnings. Likewise Sensex also has yearly earnings.

Sensex earnings for the financial year 2004 (10 years ago) was Rs.348. For this financial year, ending this month (March 2014), the earnings are expected to be Rs.1326.

Sensex is nothing but representation of how many times (called as PE multiple) the earnings are currently valued at.

Assuming a multiple of 18, Sensex should have been at 6264 10 years ago and at 23868 now.

Please understand this. It’s very important for you to understand markets as an investor.

6264 of 2004 = 23868 of 2014

The market is now short of 22000, nearly 10% lesser than the number illustrated above.

Markets always look at and represented as multiple of one year forward earnings.

Since we’ve only 3 more weeks to end this financial year, what is relevant now is to look at financial year 2015 (April 2014- March 2015). Analyst estimate the Sensex earnings for FY15 at Rs.1542. Applying the same 18 PE illustrated above, then the Sensex levels comes to 27756, nearly 26% more than above.

So there is no need to get panicked if market scale new highs.

Market will always continue to scale new highs.

From the base of 100, to current level of 22000, market should have made 21,900 highs! (Like counting 101, 102, till 22000:-)). Considering the closing levels of market each day for last 34 years, someone has mentioned in Twitter that there have been 466 new highs during the last 34 years journey of Sensex.

Markets would continue to scale new highs in the yeas and decades to come as long as earnings keep growing.

I’ve mentioned many times before that earnings closely track the nominal GDP growth rate of the economy and the markets grow in turn with earnings.

Our nominal GDP growth (GDP growth rate + inflation) has been around 16% for decades and that’s how Sensex has also grown all these years.

That is the basis for the logic of projecting long term growth rate of 18% (adding 2% dividend yield to 16% above) over one to 2 decades.

Last 6 to 7 years, we’ve been going through time correction and the markets have not moved much. I feel, based on reversion to mean, next few years there should be a strong bull market.

I do not know whether the current rally will sustain or markets will correct. I also don’t know how the election results would be and how the market would react to same.

But what I can say with confidence is that after next 5 years, the market levels would be far higher than what it is today. Economy is turning around and our growth rates are likely to improve in next few years. As growth goes up, earnings also go up and so is the market.

In an investing life time, one can get to ride few bull markets. I’m confident that one such would happen (or the seeds are being sown now) during the course of this decade.

People get worried on both ways- if the market goes down or up. Do not be a ‘worrier’. Stay the course and reap the rewards.

All the best.

6 Responses to “Points to ponder”

  1. Shankar said

    Thanks Muthu, you clearly mentioned what market represents. I think in one of your earlier article mentioned that just missing few best investment days, return will reduce drastically. Since we know the best days only after it happens, better invest through SIP and invest any bonus amount immediately without waiting for good time.

  2. Muthu said

    Yes. You’re right, Shankar.

  3. rajivahuja said

    To. Wise Wealth Advisor,

    I tried posting my posting my comment on word press but it refused to take it.

    With warm regards.

    Rajiv Ahuja

    P.S-Thanks for keeping the faith.

  4. Milind said

    Thank you Mutthu….we are staying on course….Education ,Retirement….Long Term Goals…I am staying with my siips with shankar,Sukumar(Recently retired Siva…We miss u sir) and Prashant and Hope I will reap the rewards in long term.As the Growth will come back in India even in China it will comeback…As a result I have taken a small exposure to Chinese market through Etf…and a small exposure to US fund for geogrophical diversification.

  5. Sudharsan.R said

    Good

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