Tuesday, September 21, 2010

Guest Lecture by Mr. Bharat Shah

In the medium to long run markets will remain bullish and by the end of this decade the BSE Sensex will reach 6 digits. Though it may sound startling, this was the first message that Mr. Bharat Shah, CEO and Managing partner at ASK Investment, gave us during his guest lecture on 21st September 2010. Mr. Shah stated that this valuation of the markets is based on the growth numbers and opportunities that are present in the economy. Historically if we see the markets have grown by a multiple of ten in each decade- rising from few hundred points in the 1980s to the current five digit levels. But the 6 digit forecast is not merely based on the past trends, rather it is based on the expectation of growth that is still to occur.

In terms of Purchasing Power Parity, India produces around 7.5% of the world's total GDP. If we compare the price that we pay in the market for Indian businesses it is around 2.5% of the total capital markets. Also the global portfolios have Indian presence at a mere 0.35%. Hence we see a clear value-price gap in the numbers. Also the value itself is an upward rising number. This is not because the GDP of other countries is not going to grow or show a negative growth but because India's GDP will grow considerably faster than most other economies. So as the price and value will converge, we will see a CAGR of around 18% in the Sensex taking it to 6 digit levels in the next decade.

Let us dig deeper into the growth story. Amongst the EMEs, Brazil is driven mostly by agriculture, China by its manufacturing and Russia by its resources. Only India is driven by agriculture, manufacturing, services and  (to a small extent) resources.  The huge domestic consumption of India (around 83% of GDP) fuels this growth. This also means India is much less exposed to shocks from the developed economies than its BRIC peers. Being a country with an average age of 29 years, India has higher energy to  pursue higher levels of growth. Mr. Shah said that with a better governance India can achieve a double digit growth rate within the next three years. 

Mr. Shah also gave SIMSREE students some cardinal rules to be followed if they want to invest in the equity markets. He said that investing is a very serious activity which should not be subject to the roll of the dice. The trick is  to identify a good business, ascertain the capabilities of management and most importantly to buy gold at the price of silver. This is one sure way of making huge profits in the equity markets. It requires a disciplined approach towards valuation and a rational view about the markets. At the conclusion of the lecture all of us were very optimistic visualizing the four decades of wealth creation that lie in front of us. 


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