Zero, zero, zero, zero sum game

But is the Sensex a true reflection of India’s economic health? Let’s examine it through big numbers. Between 1986 and 2006, the economy changed the gravity of its economic composition. While the services sector continues to lead, its dominance has increased further, rising 13.5 percentage points, from 38.9 per cent to 52.4 per cent or more than half the GDP. Manufacturing too, has grown, but marginally, to 27.1 per cent. Agriculture has lost 15.8 percentage points to 20.5 per cent.

What is the reflection on the Sensex mirror? Two decades ago, the Sensex had just two services companies — Indian Hotels and L&T — no banks or technology companies; the rest were all manufacturers. So, while the share of services in India’s GDP was almost two-fifths, more than 9 out of 10 companies in the Sensex were manufacturers.

It’s a different mix today. And the 13 times the Sensex has changed its composition since then reflects the real economy more accurately, though not completely. Today, every third company in the Sensex is a services company — Bharti, the HDFC duo, ICICI Bank, Infosys, L&T, Satyam, SBI, TCS and Wipro — whose combined market capitalisation is Rs 512,050 crore.

Which means 33 per cent of the Sensex companies command 41 per cent of its total value. It is still 10 points short of reflecting the real economy, but then, there is no agricultural representation, either. And we shouldn’t get too literal with barometers. Sensex 10,000 is a better representation of a new India, one that’s different from the excessively manufacturing-dominated Sensex of two decades ago.

The biggest surgery on the face of the Sensex happened on August 19, 1996, when 15 new companies replaced the old. Six companies came to stay — Bajaj Auto, BHEL, Gujarat Ambuja Cements, SBI, Ranbaxy and Reliance Energy replaced Bharat Forge, Bombay Dyeing, GSFC, Premier Auto, Philips and Ceat Tyres, respectively. Infosys, a seemingly permanent fixture in the Sensex, is only eight years old (it entered in November 1998), Satyam is two years younger (April 2000), Bharti is less than three years old (November 2003) and TCS joined as late as June 6, 2005.

What about the future, say a Sensex 25,000? Manufacturing will continue to throw a larger shadow on the Sensex as infrastructure gains precedence and mega-projects are launched and executed over the next decade. But this dominance will be countered by the faster-growing services sector, where new industries, like organised retail, will enter the Sensex.

Money has a propensity to move towards growth, not towards digits. That is, investors will prefer to invest money in a company that’s expected to grow 40 per cent per annum rather than in one that sees a 10 per cent growth. Sooner or later, the former will overtake the slow-growth company and once it attracts adequate trader interest, will move into the Sensex.

Newly-listed companies like Suzlon, which is already the 15th most valued company of India, with a daily turnover of more than Rs 50 crore, should be among the first new entrants to the Sensex, and it may happen within this year. New companies, building the infrastructure of India or in upcoming sectors like retail, will find their way here in the medium term.

The Sensex is a dynamic entity, a flow of companies, and it is really this flow that we track — one group of companies enters, grows, plateaus and gets replaced by another group of companies that follows the same cycle. All the while, the value of the index goes up and that’s how the Sensex has grown by 15 per cent per annum over two decades, from 624 on February 6, 1986 to 10,000 on February 6, 2006.

And that’s the bottomline. For long-term investors, the Sensex moves only in one direction: up. That’s what history has shown us repeatedly. In a study, I found the Sensex to be a zero-risk investment, behaving like a capital guarantee bond with a compounded annual growth rate of around 15 per cent, if — and this is an important ‘if’ — the money stays there for 15 years and more. No downside. The chances of falling rise as the time period shortens.

If investors are upbeat and optimistic about the economy, they should allow the market to play out its numbers. If, as householders, they are comfortable with 20-year EMIs, all they need to see is that investing in the Sensex is just the same except that it’s an asset building, not a liability managing, exercise.

Keeping that history behind us and on yesterday’s CSO quick estimates that have pegged economic growth at 8.1 per cent for this fiscal, with a 10 per cent growth ahead, we can very easily assume a Sensex growth of 13 to 15 per cent, simply riding inflation. And even though the Sensex doesn’t move in a straight line — although we may begin to think like that keeping the past two years as benchmarks — it should cross 20,000 by 2011, 30,000 by 2014 and 50,000 by 2018. That’s just five, eight and 12 years away. But please don’t ask me whether it will be over 10,000 on Budget day.