Monday, April 03, 2006

Sensex is going to fall!

In the past two postings we have clearly indicated that the Sensex and the overall market of Indian stocks is overvalued. We can confidently say that the market is due for a fall.

However, as discussed by Alan Greenspan (then Chairman of the Federal Reserve Board, US) in 1997-98 in his briefing to the US Congress the stock market is showing "irrational exuberance". We could modify it slightly to portray the precise nature to "mis-rational exuberance".

The fact is that the Indian Economy is on a long-term high-growth rate path. However, that is going to happen over the next 50 years or so. However, given the India Shining echoes that are resonating across the globe everyone is reinforcing everyone else's optimism and we are discounting the 50 year growth path right now.

The economy will definitely grow at a huge rate. It will probably be 8% to even 10% on average for the next 25 years at least. However, will it be 8% every year for the next 25 years? Will all the companies in Sensex and BSE 200 etc. grow every year at the rate of 15% or higher for the next 25 years. Of course not. N

Some companies will falter. When that happens the investors will lose. Since at current prices the market has discounted all possible future growth for more companies. SO even if the economy and the companies grow as projected it will still not make any money for the investors. If the economy does not grow or the companies falter in thier growth the investors are going to lose big.

In our opinion and also some sane analysis earlier by others ( where they predicted Sensex to cross 10000 sometime in 2009. So what has happened is that the India Growth Story has been overhyped and what should have happened sometime in 2009 has happened 3 years too soon. Given that Sensex is now probably going to cross 12000 within this year, we are probably way into the future. Will be going back to future in 2009?...


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