"Logical" Return Expectation from Indian Market

Yeah, Talking about Indian Stock Market again:) What else ......

Lets set the ground rule first. Someone says : "There is no nobel prize yet for predicting stock price of tomorrow, stting today". (S)he is right absolutely. Then what all the hoop-haaps around? Some people (like Fund Managers, News Makers, market participents) are earning their bread and some people (like me) has invested in the market (and hence 'interested'). So knowingly or unknowingly we all together trying to justofying how 'prudent' we're from the rest :) And hence all sorts of so called - 'Analysis' - be it fundamental / technical / speculation. At the end of the day - its an effort to say that I'm right.

Enough self demotivation. Lets come to the point.

Lets do some addition. No no .. it's not gonna to be a binary addition, BCD addition, will be simply arighmatic, whole number addition. + some log calculation.

Indian Economy is expected to grow at 6 to 9 % in relative terms. 'Relative' means discounting the effect of Inflation.
So if we take inflation too, it is called 'Nomimal' growth. Assuming mid term inflation would be around 6%, the yesr-on-year (Y-o-Y) growth of Indian Economy would be 9+6 = 12-15%. It means if you invest Rs100 in 'Indian Ecomony', it will becomes 115 after one year. But with this 115/-, you would able to buy goods/services for which, if you buy now you need to pay only Rs 109/- (lets hope for 9%). If not - 115 becomes 112, and 109 becomes 106. Note that this is the Real Money! - Bank Interestes are not Real/Relative, those are Nominal (i.e. Not Inflation Adjusted). Straight Hisab. Jeo ....

So what will be the Indian stock market? It's been traditionally seen that Indian Market (I mean Index, say Sensex/Nifty / BSE 500) tends to give return more than double . This is almost irrespective of bull/bear phase. When India was at 9%, 30 companies of sensex was giving ~20% return. Now we're at around 6%, sensex is almost delivering ~13% .... like this.

Now the beauti is that if we assume our Real Growth would be somewhere middle, say 7.5%. So Nomial Value will be 7.5 + 6 = 13.5%. Stock Indices will give, say just one less percent than double (like taxi meters). So ((13.5*2)-1) = 26%.

Now the beauty! - The Inflation will be deducted only once from this 26%, NOT TWICE. Because simply the adjustment has to be done only once :) .... so it becomes 26-6 = 20% - IN REALITY! So Rs 100 will becomes Rs120 and adjusted to inflation! It means with this extra Rs 20, you would actually buy a product/service that would cost 26/- one year down the line!

Now, lets say you invest Rs8300/- in Sensex. We're talking about 20%. So when it would be doubled?

pt = p(1+r)^n
16600=8300(1+0.2)^n
1.2^n = 2
n = (log2)/log1.2 = ~3.8 years!

There is another factor here. We're assuming (PE) 'Price-to-Earn' is a constant throughout 3 yrs 9 months. That wont be anyway the case. However for simplicity lets assume that.

We'll discuss the effect of PE later some times.

Have a nice day dream :)

Joe Hooooo ... India .... Stay Invested ... MORE THAN 3.8 Yrs. ....