What lies ahead

Never has the market rallied so brazenly, yet so consistently. But amidst all the confetti, the ordinary investor, you, are overwhelmed and unsure. What should be your strategy?

Print Edition: November 1, 2007

The bull is on a rampage. And on its way to greater heights, it has spurned many predictions. In November 2006, MONEY TODAY estimated the Nifty (the bellwether stock index of National Stock Exchange) to range between 4980 and 7115 over the next five years. Seems way too conservative now. On 10 October, the Nifty crossed 5400 level.

Never has the market rallied so brazenly, yet so consistently. But amidst all the confetti, the ordinary investor, you, are overwhelmed and unsure. What should be your strategy? Is it time to sell your holdings and book profits? Will it be absurd to enter the markets now? There is one way out of this confusion: getting back to the fundamentals of investing. In the long term, the greatest impact on a stock’s price is the company’s performance, especially profits. This logic holds true at all times, no matter how high or low is the market index.

We had used company price-earnings ratios (PE), the past trends in earnings growth and minimum-maximum valuations to generate estimates of likely Nifty levels in 2011. In the eight-year period from 1999 to 2007, the earnings per share (EPS) of Nifty companies rose by an annual compounded rate of 16.6%, while the annual price gains were 24%.

Based on the average earnings growth rate across 1999-2006 of 15.5%, we suggested that systematic investment plans (SIPs) in Nifty index funds would offer a fiveyear return of 11-19%. What happens when we include 2006-7 in our calculations? Estimates surge as key variables have improved sharply in the past year.

In the past five years, the Nifty has delivered an EPS growth of 29%. It has also shown a year-on-year price gain of 41%. In calendar year 2007 itself, the PE has never dropped below 17. If the Nifty can generate EPS growth at 29% for the next five years and maintain a valuation of between PE 14 and 20, it will range between a highlow of 11000 and 15700 in 2012! An SIP index fund investor at current values could then expect an annual return of 19-28%. But 2006-7 was a bumper year. And one swallow doesn’t make a summer.

If we assume the Nifty will continue to deliver 16.5% EPS growth per year and the PE will move in a band of 14-20, then projections suggest that the Nifty will range between 6450 and 9250 in 2012. An SIP investor will then get returns of around 15.5% if he holds through all the ups and downs of the next five years. On the maximum, it can touch 28%. Both ways, the markets are still worth betting on!

Devangshu Datta

What's your score?

Want a better interest rate on your home loan? Or a faster disbursement of your loan amount? Make sure you have a good credit score.

For the first time lending institutions would differentiate their prospective borrowers on the basis of their individual credit scores. Credit Information Bureau (India) Limited (Cibil) is soon launching a credit scoring system in India, similar to the one followed in the US.

It would assign scores to borrowers on the scale of 100 and 1000. The scores would be arrived at after taking into account their credit information reports, including past performance record and the current loan status. A higher score would give one greater bargaining power.

However, those with a score of 100 or close to it would have to dole out higher down payment and pay steeper interest rates vis a vis a high score holder.

The RBI too is working towards the same end. The central bank has already called for applications for registration from companies keen on tracking credit information.

From your utility bill payment history to whether or not you own a voter I-card, everything will be collected by these companies once RBI grants them a licence. Short of thumbprints and DNA, anything that can be used to determine a person’s financial worth will be used to assign the credit scores.

Priya Kapoor

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