India’s market capitalisation to gross domestic product (GDP) ratio, also known as the Buffett Indicator, named after Warren Buffett, stands at 103%, if the estimated GDP of ₹258 trillion for FY23 is taken. This is third-lowest among the 15 largest markets after China and Germany. The ratio is 116% based on FY22 estimated GDP.
Analysts say whenever the ratio is above 100%, the stock market is considered to have entered the expensive zone. But it needs to be measured on the basis of historical average and compared with peers. Global fund managers consider the market-cap to GDP ratio as one of the key parameters to compare the valuations of various markets.
Analysts said all valuation ratios have been indicating that markets are expensive in the past year mainly because of the high liquidity driven by ultra-accommodative monetary policies by global central banks. With US Federal Reserve signaling the withdrawal of liquidity markets with elevated PE ratio have been impacted the most.
“Even if we take other parameters of valuations like PE ratio, price to book, or the dividend yield, valuations are much higher than historical averages,” said VK Vijayakumar, chief investment strategist at Geojit Financial Services. “But in this age of abysmally low-interest rates and exuberant retail investor participation, valuations are bound to be higher than historical averages.”
Based on the price to earnings (PE) ratio – another popular valuation measure, the Nifty 50 index is currently trading at 23.68 times FY22 estimated earnings and more than 20 times FY23 earnings. The 10-year average forward PE ratio is 18.32.
Some market participants are comfortable with the market-cap to GDP ratio being higher than average on optimism that the economic growth would pick up. “Though at projected GDP in FY23, India’s M-cap to GDP ratio is above 100%, we don’t consider it as stretched or expensive valuation as GDP is expanding at a high decadal rate of over 9%. So, the market is enjoying premium valuation,” said Lav Chaturvedi, CEO, Reliance Securities. “We are becoming a preferred nation for investment due to the China Plus One policy, which would continue to drive market valuations in the coming years and helps us achieve the $5-trillion landmark.”
