Warren Buffett’s favourite share market gauge says India stocks overvalued; cross 2008 levels

Indian share markets have now entered the overbought territory, going by billionaire investor Warren Buffett’s favourite stock market indicator. The market capitalization to GDP ratio of domestic stock markets at Thursday’s close topped 100% for the first time since the global financial crisis of 2008. Often called the Warren Buffett indicator, after the legendary investor who invented his gauge, an aggregate market cap above 100% of the country’s GDP hints at stock markets trading with stretched valuations. India’s market capitalization to GDP ratio was just 56% at the end of the last financial year 2020.

M-Cap to GDP crosses 2008 levels

At closing on Thursday the market capitalization of all BSE listed firms soared to touch Rs 197 lakh crore. On the other hand, NSO’s first advance estimates of national income for 2020-21, released earlier this month, said that Nominal GDP at Current Prices is likely to attain a level of Rs 194.82 lakh crore. Translating to a market cap-GDP ratio of 101%.

With valuations stretched and markets at all-time highs, analysts suggest investors to stick to large-cap stocks. “Focus more on largecap stocks and on safe sectors such as IT, pharma, chemical, and FMCG,’ Vinod Nair, Head of Research, Geojit Financial Services told Financial Express Online. Nair added that investors should book profits at this time wherever they have made a handsome profit so far.

Valuations stretched

India’s long-term average market cap to GDP ratio has been near 75%, according to brokerage and research firm Motilal Oswal. In a recent report, the brokerage firm highlighted that the ratio has been volatile in recent years. The gauge was at 70% in the fiscal year 2019 then dropped to 56% in the previous financial year, only to now recover and cross 100%. Domestic markets are also trading at high earning multiples. India’s financial year 2021 P/E was at 27.1x at the end of December. Only Brazil was trading at a premium to India, while other key markets continue to trade at a discount. On a global front, India’s share in the global market-cap was now at 2.4% — its historic average. Over the last 12 months, market-cap for the world increased 18.7% (USD16.2t), while the same for India increased 17.4%.

Analysts believe valuations are high but do advise investors to trade with a long-term view, hoping economic recovery would justify the valuations. Economic indicators do hint a faster-than-expected economic recovery. “Possibility of a huge correction at this juncture is very low. The correction might be swift and not a deep one as minor corrections are being considered as buying opportunities,” Vinod Nair said. In the near term, he finds the Union Budget to be a key thing for investors to watch out for while expecting valuations to ease out as earnings improve.