I have no idea what the market will do next week or even the next year. Also this analysis does not apply for the speculators who dont worry about the fundamentals of a business or the economy they are investing in. I am pretty sure there are some guys in Dalal street who are pretty smart and know when to buy a stock and when to exit and make a tidy sum on that. They might make a ton of money doing that. But I guess if you follow the fundamentals you will not be bad yourself.
My suggestion is to buy a index fund from UTI or HDFC.(UTI is cheaper). Now let us look at the fundamentals.
At today's price levels the sum of total of companies in the sensex make an average of about 6.7% profit.(source: value research online. remember: this is NOT the stock price appreciation. This is the profit they make in their business. So if you buy Rs. 100 worth of shares in the index then you can expect those companies to earn a rs.6.7 return. This money will most likely not be given to the shareholder but will be invested in the business to grow it. Shareholder gets his money by share appreciation and may be dividends. For the expert investor the P/E ratio of the indian index is around 15!! Thats what this means)
Now due to the economic downturn profits of many companies may fall in the coming year. So let us subtract 10% and that would put our return roughly around 6%.
Let us assume the inflation rate in India is 4%(conservative estimate) and let us also assume the companies grow about 4% every year in inflation adjusted terms(again conservative estimate). So the total profit of a company would increase about 8% every year. At this rate for our rs.6 profit to become rs.12 it would take about 9 years.
Assuming markets are willing to price the shares in the same 6% return then the appreciation of the stock in 9 years would be exactly 100%(or double).
Now that being said who knows how much the market will value the securities at. For example it is currently being valued at 6%. In the peak I think it was at 2%. Now since the economy is gloomy people want a premium and value it at 6%. Historically 6% valuation is about right(to put it another way a P/E ratio of 14 or 15 is what usually the securities trade at)
