Securities market is bound to have crests and troughs. It’s a cycle of tremendous falls and amazing rises. Backing on recent history, 2007 was an amazing year for the Indian market followed by major downfalls in 2008. It took some time to bottom out completely and came back stronger to become one of the top performers in the Emerging Markets segment. Among all BRIC nations, India market outperformed all others with a whopping 26% in 2012 and even bettered it in 2013. Several triggers such as recovery of Global Markets, reduction of Global Commodity Prices and Foreign fund inflows have boosted the Indian economy overall.
Now, the million dollar question is – Where is the NIFTY going from here six years down the line? Will it touch 20,000 in 2020? It might sound very lame at this point in time, but the market has always proved historically that it has the capacity to move up at least 3 times from the current levels by the next six to seven years. No denying the fact that there would be forthcoming turmoil in the economy driven by internal and international forces, however, all being discounted; the fundamentals would push the market ahead.
Let’s go through the fundamentals that are expected to boost the NIFTY levels to 20,000 and beyond.
Markets globally have been gradually improving, which is wiping out the pessimism in the investors’ minds. It is clear that the investors have developed the sentiment that the markets have bottomed out over all and have come out of the recession. Just by taking an example of two of the world’s largest economies – Germany and the US markets have been at an all time high. At the same time, on the Asia-Pacific segment, Australia and Japan have been trading on yearly highs. Overall, it is more likely than not that there would be improvement in global cues.
If you look at the macroeconomic dynamics in India and the political situation, it’s quite evident that it can’t go any further downhill from here, while the new Government of India has been up to the task to strengthen it. It’s clear that strict reforms would be introduced such as restrictions on import export, charging surcharge on income band beyond ten million rupees an year or regulations to bring back the black money.
Foreign Investments and Liquidity
Over the years, India has been very unfriendly with regards to foreign investments due to the rigidity in terms of reforms and regulations. Finally, there has been a shift in the approach by the new Finance Ministry and we are seeing pro-growth regulations to invite foreign investments. This would help boost liquidity in the economy hence driving it to new levels.
One of the biggest and ongoing problems in India has been its fiscal deficit. The deficit has kept growing over the previous years on the basis of global economic crises back in 2008. But, post election of the new Government, the finance ministry has been committed to bring the GDP levels in lines with the expectations. If the promises are maintained and measures are taken continuously to back it, we would see a lot more foreign investments being pumped in.
Capital Asset Pricing Model
We can calculate the return that NIFTY has offered using the Capital Asset Pricing Model. The risk-free rate for India is at 10% and knowing that the return for the US market is between 5% and 6%, we will consider it at 5.5%. By the assumption of Beta being 1, the rate of return provided by NIFTY is 15.5%. From the calculation, we can easily make out that the Indian equity market outperformed the US market and by using this trend or pattern, it is likely that NIFTY will grow by 20% approximately through the next six years.
Gold has been a commodity which has rallied in a big way over the last decade or so, with the maximum yield through the past five years. In 2007, Gold was trading at an average of 10,500/-, which rocketed to 30,000/- last year. The monetary easing in the US during the financial crises in 2008, depreciating rupees and high inflation were the three basic triggers to the rising gold price. With the Reserve Bank of India taking necessary measures to control the depreciating currency, Gold Prices are expected to reverse hence boosting the equity markets.
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Globally, the economy had failed to respond to the stimulus and China having slowed down leading to a dip in purchasing power of natural resources. Investors went on to sell their commodity holdings that they had gathered over the past decade or so. It has become clear that on measures being taken to ease the inflation, investors would pump in funds for equities rather than in commodities. The reduction in inflation would lead to increase in purchasing power for consumers as well. There has been a drop of around 21% in Brent Crude price from last year’s high of $119 and we are to see further decrease in Oil Price. With the balance of economics, Oil Prices going down would lead to reduction in air fare, food, fiscal deficit and inflation, which would help boost the Indian market as a whole.
With the above fundamentals, economics and mathematics, we hope that investors are not likely to underestimate the future levels of NIFTY.