BSE Sensex P/E vs. EPS growth
An interesting post at SeekingAlpha on expected returns for the BSE Sensex 30 market index vs. past performance:
Since 1997, the Indian economy has grown 146% at a compound annual growth rate [CAGR] of 9.41%. Over the same time period, earnings of the 30 companies that make up India’s BSE Sensex have grown around 150%. No surprises there. However, over that same 10 year period, India’s BSE Sensex has risen 345% at a CAGR of 16.11%.
I found this chart to be particularly telling:
Let’s assume that the earnings of the 30 companies that make up the BSE Sensex increase 18% annually for the next 3 years without hiccups. Let’s also assume that at year end 2009, the BSE Sensex will be trading at a higher than average trailing P/E of 19. This puts the BSE Sensex around 19,000 at the end of 2009, 30% higher than current levels of 14,500. Even based on this optimistic hypothesis, equity investors will, at best, earn an average return of 9% annually over the next three years.
Hmm . . . if you agree with the logic, then 9.5% fixed deposit rates start to look quite good!
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June 6th, 2007 at 12:51 am
I quite agree with you on this, 19k by 2009 seems fair and pretty much the best we can expect. So why take the chance? better to go for the fixed returns.!
June 6th, 2007 at 9:14 am
The simple answer is TAX..TAX and TAX will kill your plans for fixed returns!! Effectively you will earn 6.34% after tax from Fixed Deposits as compared to 9% tax free returns!
June 6th, 2007 at 2:26 pm
The rise in inflation also is a downer. Inflation currently at 5.xx% is definitely a concern, and in reality the actual inflation seems to be much more than what these figures suggest.