Will the Sensex touch 20000?

Domestic equity markets have witnessed a steady rise in the last four years. The BSE Sensex gained 44% in 2006 alone. Returns from the Indian markets in the last two years have been substantially higher than most other world markets. Admittedly, this is the result of a never-seen-before degree of buoyancy in the economy and robust corporate profit growth.

India's economic growth remains buoyant, with real GDP growth at 9.1% YoY for first half FY07. India continues to be the second fastest growing economy in the world after China. Favourable demographics and rising levels of disposable income would co-ntinue to spur consumption growth. Hence, urban consumption, investment growth led by corporate capex and infrastructure and growth in services will help India move towards higher levels of sustainable growth.

In addition, the growing trade linkages and reducing irritants for trade, are helping foster a positive environment for overall GDP growth. Further, this is helped by a tax system, which is, slowly coming close to adopting global best practices. India remains resilient and decoupled fr-om a global economic slowdown. This is because the main growth driver for our economy is private consumption expenditure, which constitutes 61% of the GDP, and not exports.

It's a fact that the valuations of the market are above the past average, with the P/E multiple for the BSE Sensex (on a one year forward basis) at 17.9 times, which is 42% higher than the average P/E of 12.6 times in the last nine years. However, there is a strong case for these premium valuations. The quarterly earnings from corporate India and the overall economic gro-wth has been strong. The strong fundamentals together with the importance of corporate governance and transparency make India attractive from an investment point of view.

Therefore, the overall long term trend remains positive. Many believe that the future growth of India for next two decades will have no parallels in the annals of economic history, except the last two decades in China. With this newfound enthusiasm about the long-term prospect of Indian economy, it's conceivable that Sensex will continue its northward journey in '07 and beyond. It could touch 20000 in 18 to 24 months.