PERILS OF OVER-EMPHASIZING A FEW TURNING POINTS

GDS: Gross Domestic Savings (Fiscal Year)
GDCF: Gross Domestic Capital Formation(Fiscal Year)
Sensex year-end (Calendar Year)
Source: Bloomberg; RBI

It seems from this graph that the Indian equity market delivers sustained stellar returns when the gross domestic savings and capital formation rise significantly. This suggests that superior market moves coincide with periods of rising trend growth rate of the economy (for the logic please see my previous post). Careful statistical analysis, however, points to a positive but statistically tenuous relationship.


SENSEX RETURN = 20.90(0.0034) + 0.93*GDFC Y-o-Y%(0.2645)
P-values in the brackets.

R^2= 5%

The obvious conclusion is that economic growth is only one part of the puzzle. Valuation is important. Rapid growth which has already been discounted by the market will not help.