Making an “All-Time High” is a characteristic of a market in a growing economy. We often face a dilemma when investing at the “All-Time High” of a market. However, when we examine the data from 1991 to March 2024, out of a total of 33 years and 3 months, the market reached an “All-Time High” 22 times. This means the market reached an “All-Time High” approximately every 1.5 years. The most astonishing data to note is that the market has reached an “All-Time High” every calendar year for the last 8 consecutive years.

Growth, profitability

Since 1991 to March 2024, the nominal GDP has grown by approximately 12% CAGR, and the Sensex has grown by 14% CAGR. So, how does the mathematics work? Growth in nominal GDP consists of the growth of real GDP plus inflation. Therefore, if the demand for goods and services increases along with the prices of goods and services, the profitability increases for providers of these goods and services companies. This increase is eventually reflected in stock prices. And well-managed businesses grow faster than the overall economy, which is eventually reflected in the growth of Sensex. Thus, growth in nominal GDP translates into profitability, which eventually reflects in a rising stock market.

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In 2000, when India was the 13th largest economy, the Sensex reached its all-time high of 5,934 points. Ten years later, when India became the 10th largest economy, the Sensex had notched 21,005. In 2020, when we were the sixth largest, the all-time high was 47,751. As of March 2024, the Sensex had leaped to 74119.

India has just surpassed the UK to become the fifth largest economy and is expected to become the third largest by 2030, surpassing Germany and Japan. However, this journey towards the third biggest economy may be very different from the earlier jump. During this journey until 2030, India may witness noticeable growth in per capita income and hence consumption, which is the biggest component of our nominal GDP, followed by investment, government spending, and net exports.

Roti, kapda, makan

What is more important is when the economy moves beyond roti, kapda and makan (food, clothing and shelter) to ‘eat well, look well, and live well’, which is led by so-called discretionary spending, the nominal GDP may grow at an unprecedented rate and all this will eventually be reflected in the stock market level.

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It’s worth noting that the stock market doesn’t always sync with nominal GDP growth in the short term. At times, the stock market can outpace nominal GDP significantly. While nominal GDP tends to grow steadily over years or months, the stock market can occasionally surge, even by 12% in a single month. Rapid overnight growth isn’t true growth but rather an instance of swelling. Such scenarios mark an overvalued market during extreme optimism, which can also swing to being undervalued during uncertain times. These fluctuations constitute market cycles. Thus, investors must acknowledge that along this journey, they’ll navigate through these cycles of greed and fear.

So, in a nutshell, in the short run, it is sentiment like greed and fear, demand and supply that decide the market level. Over the medium to long run, it is profitability that decides the growth of the market, but over the very long term, it is India’s aspirations and dreams that decide the growth of the economy and hence the market.

Young Indian’s dream

People in their 50s, 60s, and 70s need to look at what young Indians are doing. Today, India is one of the youngest countries. What people in their 20s, 30s, and 40s are aspiring for or dreaming of will decide the long-term economic growth and hence the market level. Whether they want to live well, look well, or eat well, it is the Young Indian’s Dream that drives the market over the long term.

Chirag Patel, is co-head-products, WhiteOak Capital AMC.