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I have a confession to make. Whenever anyone asks me where the stock market —or some specific stock — is headed, I give glib replies based on what I have read on the newswires.

If nothing seems to explain anything, I smile mysteriously. My most believed line is the astrologer. All I have to do is say some astrologer has been advising clients to stay away from the markets till March 15, and that’s why the markets are crashing. I am instantly believed.

I feel like a charlatan, someone peddling snake oil. However, I am not quite ashamed of this because people don’t seem to want an honest reply. For those who do want one, here are my real views on the market.

I am putting my money where my mouth is. I invest mostly in stocks that are a proxy for the economy — like banks. I invest in well-run banks because they will earn more if the economy fares well.

I believe the bull market that began in early 2003 is alive and kicking. And it will continue to rise after big and small corrections now and then. I cannot predict where stocks will be tomorrow, or next month.

But I can confidently say that the Sensex will touch 40,000-50,000 in the next six to eight years. Infosys will hit Rs 9,000-12,000 a share around that time. And this has nothing to do with any inside knowledge about the markets or Infy.

It’s simple maths — based on the compounding effect. All you have to do is assume the Sensex will grow at 15-20% a year, or Infy at 20-25% a year. These are conservative estimates if we assume inflation at 5% a year.

But why should we assume that the broad market will grow at 15-20%? My answer: if the economy is going to grow at 8% over the next few years, add inflation, and you get 12-13% growth anyway. And if you believe the Sensex represents the best and brightest in the Indian economy, these companies ought to be growing even faster than the economy. Hence, 15-20% is eminently do-able.

What if foreign institutional investors (FIIs) decide Turkey or Brazil are better bets than India? Surely, the Sensex will crash? Of course, nobody can rule that out. But it’s not probable.

India will be a trillion dollar economy next year — only the third one in Asia after Japan and China. On the other hand, the world’s richest economies are growing old — which means they have trillions of dollars of pension funds to invest. They can invest in economies growing at 3-4% (US, Europe, Japan), or those growing at 8-15% (China, India, Latin America). Why would a long-term investor want to avoid Asia’s third largest economy indefinitely?

But what if China soaks up all the global liquidity? Actually, even if investors had to make an either/or choice between India and China, the flows will start tilting slowly towards India over the next decade.

Two reasons why: unlike China, with its opaque laws and extreme obsession with national interest, investors have always made more money in India, whether through the stock market or through direct investments. Few companies have made serious money in China.

The other reason is that China is, quite simply, an inefficient user of capital. Over the last few years, it has had to use increasing amounts of capital to keep growth rates up. In 1991-95, China needed $3.4 for every additional dollar of GDP. By 2005, it was closer to $5.

India, in contrast, is well below $4. If you were a canny investor, would you put your money where your capital will produce more per dollar of investment or less? The hype about China has so far blurred these issues but sooner or later investors will figure this out.

So don’t worry too much about what the FIIs will do next. Over the next few years, unless we completely mess things up politically, they have to be invested in India.

And then, don’t forget our own money. As incomes rise in India, savings will rise and need to be invested. More and more Indians will be investing in stocks, directly or through mutual funds.

Pension funds will enter the picture sooner or later. With all this money, where else can the market go but up?

My advice to all investors is simple: what money you can’t afford to lose, you should invest in bank deposits, PPF or debt funds. What you can afford to risk should be in stocks. Around 2015, if not earlier, you will thank me for it.

Email: r_jagannathan@dnaindia.net