Long-term investment key: Sensex projected to hit 93,000 by 2025; review historical data

Equity markets are inherently volatile, often reflecting the ebb and flow of both positive and negative events. Major geopolitical crises, domestic policy changes, or global economic upheavals can all trigger significant shifts in market sentiment. However, while short-term volatility is inevitable, the long-term trajectory of equity markets in India has followed a strong pattern, often correlating closely with the country's GDP growth and the aggregate profits of leading companies. Over time, the markets tend to converge with the underlying economic fundamentals.

This dynamic is well illustrated by the performance of India’s premier stock index, the S&P BSE Sensex, and its relationship with the country's GDP and the profitability of the Nifty 50 companies. To understand this pattern, let’s explore the historical trends that reveal how markets have reacted to different macroeconomic events and how they eventually track the economy’s underlying growth trajectory.

Market Movements and Geopolitical Events: A Short-Term Snapshot

Over the past few decades, the Indian equity market has been impacted by a range of significant global and domestic events.

The Russia-Ukraine conflict (2022): A period marked by high volatility, with the Sensex experiencing a decline of 13.71%.

COVID-19 Pandemic (2020): The pandemic triggered a sharp market crash but ultimately led to a remarkable recovery. The Sensex saw a drastic fall of 38.06% during the initial lockdowns but surged as the economy gradually adapted to new realities.

Demonetization and GST rollout (2016): While these bold policy changes aimed to formalize and streamline the economy, they initially resulted in a market decline of 21.21%.

The Global Financial Crisis (2008): The world economy faced a severe downturn, and Indian markets were no exception, witnessing a steep decline of 55.28%.

Eurozone Debt Crisis (2011): Another external shock, leading to a 24.98% dip in the Sensex.

Dotcom Bubble (2000): The bursting of the dotcom bubble caused significant volatility in global markets, including India’s, where the Sensex plummeted by 39.67%.

While the short-term effects of these crises were often severe, the broader historical trend shows that markets tend to recover over time and reflect the growth of the economy and the profitability of companies in the long run.

The Long-Term Linkage: GDP, Profits, and Market Growth

When viewed over extended periods, such as decades, the Indian stock market has consistently followed the trajectory of the country's GDP growth. A study of the S&P BSE Sensex over the past 20 years reveals a strong correlation between the growth of India’s GDP, the profits of Nifty 50 companies, and the overall performance of the Sensex. This convergence of market performance with economic fundamentals offers investors a clear long-term perspective.

As per historical data, India's GDP has grown steadily, with an average annual growth rate of around 6-7%. Corporate profits, particularly those of Nifty 50 companies, have shown similar long-term growth patterns. While short-term divergences can occur due to market sentiment and external factors, the long-term trend has been one of strong alignment between market returns and underlying economic performance.

For example, from 2003 to 2008, the aggregate profits of Nifty 50 companies grew by a remarkable 5x. During the same period, the Sensex increased by 4.84x. This demonstrates that, over the long term, equity markets generally track the growth in profits, which in turn reflect the overall economic health.

However, during certain periods, there has been a divergence between profit growth and market performance. Between 2004 and 2005, for instance, profits grew by an impressive 69%, yet the markets only increased by 15%. This was due to external factors, such as national elections, which created uncertainty and kept market expectations in check despite strong earnings growth.

A similar divergence occurred between 2008 and 2013. Even though corporate profits grew by 66%, the Sensex only gained 20%. This divergence was largely a result of the global financial crisis, which saw markets overreacting to global economic turmoil, even as the domestic economy recovered.

Despite these short-term fluctuations, over a 10-year period from 2008 to 2018, profits and markets grew at nearly identical rates—121% for profits and 113% for the Sensex. This example reinforces the idea that short-term anomalies eventually correct, and equity markets tend to reflect economic fundamentals over longer time horizons.

The Future Outlook: Sensex and India's Economic Growth

Looking ahead, the future of Indian equities remains tied to the country’s economic growth trajectory. India is poised to be one of the fastest-growing economies in the world, with a large and young population, increasing digitization, and a shift toward a more formalized economy. As the GDP continues to grow, the profits of India’s top companies are expected to rise, thereby driving further growth in the stock market.

Sensex in 2024 and Beyond:

By the end of 2024, the Sensex has shown resilience, despite facing global challenges such as inflationary pressures, tightening monetary policy, and external geopolitical risks. As of December 2024, the Sensex stands at approximately 70,000, having experienced a solid recovery from the COVID-induced disruptions and geopolitical tensions. The market’s performance is supported by strong corporate earnings, favorable macroeconomic conditions, and investor confidence in India's long-term growth potential.

India's GDP is expected to grow at an average rate of around 6% annually over the next few years. This growth rate, coupled with the profitability of India's leading companies, suggests that the Sensex could continue its upward trajectory, albeit with the usual bouts of volatility.

First Quarter of 2025: Projected Sensex Movement

If India’s GDP continues to grow in line with projections, we can expect the Sensex to perform well in the first quarter of 2025. Assuming an average GDP growth rate of 6% in the next few years, corporate profits are likely to grow at a similar pace. Based on historical patterns, if the markets continue to align with economic and earnings growth, we could see the Sensex reaching levels between 72,000 and 74,000 by the end of Q1 2025. This projection is based on the assumption that there are no major external shocks and that domestic economic conditions remain stable.

Furthermore, India’s large-scale infrastructure projects, digital transformation, and evolving consumer demand are expected to fuel corporate earnings, driving the Sensex to new heights. Additionally, continued reforms aimed at improving ease of doing business and attracting foreign investment could further support market growth.

Why the Long-Term Investment Case in Indian Equities Remains Strong

For investors looking to capitalize on the growth potential of Indian equities, the key takeaway is that while short-term market fluctuations and geopolitical events may create uncertainty, the long-term trend is one of convergence between market performance, economic growth, and corporate profitability. The strong linkage between India’s GDP growth and the performance of the Nifty 50 companies, as well as the historical alignment between profit growth and market returns, offers a compelling reason to consider long-term investments in Indian equities.

With India’s robust economic fundamentals, a growing middle class, and a favorable demographic profile, the next decade presents significant opportunities for equity investors. The Sensex, which has shown impressive growth over the past 20 years, is likely to continue its upward trajectory, provided the country maintains its economic momentum. For investors with a long-term horizon, Indian equities remain an attractive asset class, offering the potential for solid returns in line with the country’s economic growth.

By staying focused on the underlying economic fundamentals and remaining patient during times of market volatility, investors can benefit from the eventual convergence of profits, GDP growth, and market performance over the long term.

What Morgan Stanley has to say:

Morgan Stanley has set an ambitious target for India’s benchmark Sensex, projecting it to reach 93,000 by December 2025. This projection is based on a combination of structural and cyclical factors. Jonathan Garner, Chief Asia & EM Equity Strategist at Morgan Stanley, is optimistic about India’s economic trajectory, emphasizing that the nation remains one of the firm's top investment destinations globally.

“We remain positive on India. We are overweight. We believe we are in a secular bull market,” said Garner. He noted that the Indian economy experienced a cyclical slowdown recently due to factors such as heavy rainfall in August, changes in the lunar calendar, and election-related uncertainties.

Morgan Stanley anticipates a significant growth acceleration in the first half of 2024, aligning with the second half of India’s financial year. “We are more optimistic than the consensus on earnings growth,” Garner stated, adding that the firm expects earnings to rebound strongly, supporting its bullish outlook for the Sensex.

Disclaimer: Consult an expert before making any investment decisions.