Warren Buffet’s favourite stock marketplace indicator has shot above its extended term typical as domestic stock markets close to all-time highs and bulls continue to assert handle on Dalal Street. The marketplace capitalization to Gross Domestic Product (GDP) ratio of Indian equity markets is now at 104%, against the extended term typical of 75%, a report by brokerage firm Motilal Oswal showed. Nifty and Sensex recorded a 6.6% jump in February, helped by the Union Budget, RBI’s accommodative stance and a worldwide bull marketplace.
Still affordable?
However, it is not only India markets that have shot above one hundred% on the gauge. “In the US, the market cap-to-GDP has gone closer to 2x (200%). On a relative basis, India’s market cap to GDP is still reasonable as the world market cap-to-GDP is now placed at 1.29x,” Rusmik Oza, Executive Vice President, Head of Fundamental Research at Kotak Securities, told TheSpuzz Online. “The numerator that is the market cap is a function of secondary market movement and the addition of new companies by way of IPO. Globally many IPOs are hitting the market which is leading to higher growth in the market cap. Also, the fall in global GDP in CY20/FY21 has led to lowering of the denominator,” he added.
The marketplace capitalization of all BSE listed firms stands at Rs 210 lakh crore, up from Rs 200 lakh crore at the finish of the preceding month. Meanwhile, India’s National Statistics Office revised GDP estimates final Friday, saying that the genuine GDP is estimated to touch Rs 134.09 lakh crore this fiscal year, and GDP at present rates is estimated to attain a level of Rs 195.86 lakh crore. The Buffett indicator, named just after the ace investor, says that the valuations are stretched when the metric crosses one hundred%. India’s marketplace-cap to GDP ratio was just 56% at the finish of final fiscal year 2019-20, and was at 79% at the finish of the monetary year 2018-19.
Liquidity-driven rally
Although valuations are higher, the present rally is driven by liquidity, pushing all the things else away. “Valuations are no doubt stretched, but when it comes to a liquidity-driven rally, everything else takes a back seat,” Ajit Mishra, VP – Research, Religare Broking, told TheSpuzz Online. “The market is anticipating that from FY22 onwards we shall be seeing a recovery in earnings, which shall support the valuations,” he added.
Nifty‐50 valuation is wealthy on a one-year forward basis at 22.3x (i.e. on FY22E) and affordable on a two-year forward basis at 18.9x (i.e. on FY23E), according to Rusmik Oza. “We expect muted returns from the market over the next few months as valuations are rich and possibly higher bond yields may offset potential earnings upgrades,” he added.
With valuations stretched, analysts say markets will continue to go up but investors want to choose stocks very carefully. “The market capitalization to GDP ratio is clearly indicating that the Indian markets are modestly overvalued. This poses chances of higher volatility paired with an increased possibility of short-term corrections. Therefore, investors should be cautious before investing and stick to a stock-specific approach,” stated Likhita Chepa, Senior Research Analyst at CapitalVia Global Research.