Happily ever after

A sub-14,000 level will make equity investments compelling as there is a good possibility of the Sensex reaching 24,000-plus level in 3-4 years.

India is a developing economy, which is why its stock market is very volatile. This, in turn, reduces participation by retail investors, which is a pity as equities is one of the most important tools for beating inflation in the long term.

Unprecedented events like the failure of the American financial behemoths (almost reminiscent of a similar event in Japan in the late Eighties) had the world tottering on the verge of a financial apocalypse. We still don't seem to be out of the woods as Dubai and Greece are teetering on the brink of financial disaster and Spain and Italy could be following suit. But the resilience of the Indian economy, thanks to the proactive Reserve Bank of India, shone through in these trying times. The current GDP numbers suggest that India will do well in terms of economic growth in the next 4-5 years.

If the Indian economy grows at over 7 per cent in what was probably the world's worst financial crisis since the Great Depression of 1929, one can imagine how things will pan out when the worst is behind us and the world economy is on an upswing. In fact, things are looking so good that investing in equities over the next 8-10 years can make investors a lifetime of money.

Our markets continue to be heavily influenced by foreign inflows, whether it is the yen carry trade or the dollar carry trade, which is a byproduct of liquidity. While this dominance is going to continue for some time, an increase in domestic participation will go a long way in balancing this force.

In terms of the Sensex performance, a 15 per cent annual return (which has been the order of the day for some time now), is expected to continue over the next decade or so. The current upward movement, which started in April 2009, has been a worldwide phenomenon. The news of India-battering was, to a great extent, exaggerated. While the historical Sensex price to earning ratio (PE) has been around 15 times, the Sensex at sub-8,000 level in October 2008 and March 2009 was quoting almost a single-digit price earning ratio.

Even blue-chip stocks such as Tata Steel were quoting at incredible PEs of 3-4 times. The ensuing surge since March 2009 was actually a reflex action to the incessant selling pressure that saw the Sensex tumble from a high of 21,000-plus to a low of sub-8,000. As the saying goes, you can't keep a good man (read, India) down for long.

Reality seems to be slowly setting in now. While stability has also returned, many imponderables lurking in the background suggest that though a further upside seems to be on the anvil, global financial mess could lead to an unanticipated fall in the Sensex.

Other factors remaining the same, this probable decline (based on fundamental and technical parameters) could manifest itself in the second half of the 2010 calendar year. Investors should look at it as a brilliant opportunity to buy stocks at better valuations. A sub-14,000 level will make equity investments very compelling as there is a high possibility of the Sensex reaching the 24,000-plus level in the next 3-4 years.

For all these reasons, I remain bullish on the Indian economy and its equity markets.

- Hemen Kapadia is CEO, Chart Pundit