India: Stock Market Scenario Analysis

Thursday, October 30, 2008

A reader recently asked for a scenario analysis of the India Stock market. So here is a table showing various forward looking scenarios, the probability of the scenario, scenario Earnings, P/E multiple and hence projected forward looking Sensex value.

You can create the same spread sheet and change the probability to look at your unique scenario.

(click to enlarge)

I have given the following probabilities to potential economic outcomes over the coming year:

  1. Good times: 5%
  2. Normalized: 40% (average of the past 15 years)
  3. Contracting earnings : 45%
  4. Stagflation: 10% (stagnant growth with inflation)
We get a projected Sensex level of 10,482 or 15.9% higher than the October 29, 2008 close of 9,044. I think a minimum return of 20% should be demanded of this risky we have a negative potential return of 4.1% at current market levels.

At a buy-in level of Sensex 8,700 we get a potential return of 20% or break-even. This translates into a Nifty level of 2,550.

Every analysis I do brings me back to my post 2009 Outlook for Nifty/Sensex .My advice continues to be the same...wait for better buying opportunities.

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