Warning sign! Should you worry? Buffett indicator says D-St is priced-to-perfection

Warning sign! Should you worry? Buffett indicator says D-St is priced-to-perfection

NEW DELHI: Relentless rally in the last few months has taken the BSE Sensex index past 49,000 for the first time, on Monday. This is in hopes of more dollars flowing into India, especially now since US President-elect Joe Biden is promising trillions of dollars in stimulus. But despite all the optimism, a key Buffett indicator is ringing warning bells. It is suggesting that the domestic market might be priced-to-perfection and leaves little margin of safety.

The market capitalisation-to-GDP ratio, also known as the Buffett indicator, has hit a high of 98 per cent for India — stocks are deemed expensive when the value climbs above 100 level.

Should investors be worried?

The indicator – named after legendary investor Warren Buffett – is defined as the total value of a stock market relative to the economy’s GDP.

Rarely has India’s market cap-to-GDP ratio exceeded 100 per cent. This is because unlike developed economies – or the US where Buffett lives –India’s economy is dominated by the unorganised sector, which is unlisted.

At present, the market capitalisation-to-GDP ratio for India stands at 98 per cent, which is highest since FY2008’s 103 per cent, suggesting the market is priced-to-perfection.

“The m-cap to GDP ratio has been volatile as it moved from 79 per cent in FY19 to 56 per cent of FY20 GDP) in March 2020 and now stands at 98 per cent of FY21 GDP,” Motilal Oswal Securities said while suggesting that the ratio in India has a long-term average of just 75 per cent.

Not just Buffett’s indicator, another indicator is suggesting domestic stocks aren’t cheap anymore.

India generally enjoys premium valuations over other emerging markets because of its strong GDP growth. At present, P/E of MSCI India is at a 50 per cent premium to MSCI EM, which is almost at its historical average premium of 54 per cent.

This is even as the MSCI India (up 17 per cent) marginally outperformed the MSCI EM index (up 16 per cent) in Calendar 2020. Over the last 10 years, MSCI India has outperformed MSCI EM by 85 per cent, Motilal Oswal noted.

Another indicator that warrants caution is the fact that India’s share in world m-cap at 2.4 per cent is – at its historical average of 2.4 per cent. Over the last 12 months, m-cap for the world increased 18.7 per cent or $16.2 trillion. India also witnessed a similar rise of 17.4 per cent.

So are domestic stocks expensive? Partly yes, partly no.

“It is natural to think the valuations are high. But one needs to keep two things in mind. First, valuations may look elevated as the current year’s earnings are depressed. Second, we are in highly polarised markets wherein, anything linked to consumption and internet-related sectors are trading at significant premium and continue to become more expensive,” said Srinivas Rao Ravuri, CIO-Equities at PGIM India Mutual Fund.

Sectors belonging to the traditional economy such as energy and utilities are trading at a significant discount to the broader market and Ravuri thus believes there are enough pockets to find value in the current environment as well.

Data showed nearly 50 per cent of say Nifty companies are still trading at a discount. They included Coal India ( discount 57 per cent), NTPC (50 per cent), ONGC (43 per cent), IOC (38 per cent), and ITC (34 per cent). Here’s a chart:


Value 2ETMarkets.com

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