With the run-up in equity markets, India’s industry-cap-to-GDP ratio has enhanced to 91%, up from 56% in the earlier monetary year. The current surge in m-cap-to-GDP ratio has been aided by sturdy surge in domestic stocks helped by healthful foreign fund inflows. With this, India now sits above its extended period typical of 75% industry-cap-to-GDP, brokerage and analysis firm Motilal Oswal stated in a current report. The indicator is usually named the ‘Buffet Indicator’ just after ace investor Warren Buffett who popularised it. The gauge utilizes the industry capitalization of all listed firms and compares it to the country’s GDP to assess if the stock industry is undervalued or overvalued.
Market cap to GDP improves
“Market-cap-to-GDP ratio has been volatile as it moved from 79% in financial year 2019 to 56% (FY20 GDP) in March 2020 and 91% at present (FY21E GDP) – above its long term average of 75%,” the report stated. Along with this, India’s share in the planet industry capitalization has also enhanced to 2.3%, just shy of its historical typical of 2.4%. “Over the last 12 months, the world’s m-cap has increased 19.9% (USD16.3t) against an 8% rise for India,” they added.
Although India’s industry capitalization grew 8% in the final 12 months, it was behind the 54% development noticed by Chinese equities, 39% by South Korean stock markets, and 29% development recorded in Taiwan’s industry capitalization.
Valuations surge
The sturdy rally in stock markets has pushed Nifty’s valuations greater. “The Nifty trades at a 12-month forward P/E of 21x, a 11% premium to its long-period average. The Nifty P/B of 2.8x is at a 10% premium to its historical average,” the brokerage firm noted. Even the 12-month trailing P/E of Nifty is at 26.7x, a 34% premium to its extended-period typical of 19.8x. “At 3.1x, its 12-month trailing P/B is also above its historical average of 2.8x,” they added.
Among the Nifty constituents, half the stocks are now at a premium to their historical averages. Bajaj Finance is at a 109% premium to its 10-year typical P/E ratio, Asian Paints is at a 52% premium, Shree Cement is at a 77%, Divis Laboratories is a 70% premium when Nestle India at 52% premium to historical typical. Sectorally, except for PSU Banks, capital goods, infrastructure, media, and metals all other sectors are now trading at premium to their 10-year P/E ratio.