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Analysing Nifty 50 PE Ratio Nifty PE Ratio Chart, Price to Book & Dividend Yield

Analysts say, this signals rich valuation of Indian stocks, but most likely factors in a recovery in the near future given the pandemic-led slowdown in India’s economic growth. History & experts say whenever this critical ratio of TMC to GDP has crossed 1, markets corrected due to overvaluation. Like in India in 2007 it touched ~149% and 2017 as well leading to correction in market valuations. “They are global companies with massive footprints. They capture economic activity in about every country on this planet, but the market cap reflects in the US,” he said. As per the indicator, stocks are deemed expensive when the value climbs above 100 level. For India, the average 10-year m-cap-to-GDP ratio has stood at 79 per cent, as much of the economy is unlisted and nonformalised.

buffett indicator india 2021

In this case, the modified version of both the ratio and projected annualized market return will be treated the same as the original version. “RBI acts as a regulator and supervisor of the financial system. Hence, it has to raise caution at times so that the level of speculation in the markets does not go out of control and adversely affect the banking system. The current up move in the market may reverse as and when the interest rates/inflation ratio globally and locally starts to rise sharply and/or the local fiscal situation or the political situation deteriorates. The timing of these events is difficult to guesstimate as of now,” said Deepak Jasani, retail research head, HDFC Securities. Everything equal, a higher dividend payout ratio, in principle, should result in a lower growth rate.

How do you know if a market is overvalued?

On the other hand, if this ratio crosses above 1.25, the market is said to be overvalued. The problem is that the numbers required to calculate this ratio are not available to the general public. Neutral organizations like the World Bank keep on publishing this data every quarter. One of the best ways of identifying an overvalued market is by looking at the price to earnings ratio of the market as a whole.

Both results may lead to an inflow into the stock market, thus increasing the total market cap. When corporate profits are elevated, the price-to-earnings (P/E) ratio may look reasonable, as high share prices are divided by high profits. But the stock market cap-to-GDP ratio will flash a warning signal.

But as soon as India’s under-represented sectors and new economy sectors join the listed space, this ratio may rise. “The markets do seem a bit stretched but it might be too premature to call it a bubble. The unprecedented global central bank liquidity and clear communication by all central banks has given the markets a lot of comfort. However, things that worry us are more on the input and material cost side, which are seeing a sharp uptick along with increasing inflation, which can dampen end demand.

In the current Equity market outlook, India’s Market Cap to GDP ratio jumped 104, at 20-year high as on March 18, 2021. CFA Institute is the global, not-for-profit association of investment professionals that awards the CFA® and CIPM® designations. We promote the highest ethical standards and offer a range of educational opportunities online and around the world. From increased listings to the pandemic-induced economic downturn, the reasons are plenty. And for India, the latest numbers are at 70% and has rarely gone upwards of 100%. Even though we witnessed a few remarkable milestones, the Indian market has quite a distance to traverse.

Inefficiencies associated with the Buffet Indicator

This is when they started investing in emerging markets like India. The below chart shows the fall in earnings of five https://1investing.in/ stocks in Nifty 50 index. Amit has over 15 years of experience in investment analysis and portfolio management.

  • Simply put, the so-called Buffett Indicator measures the total value of all publicly traded stocks in a market divided by that economy’s GDP.
  • For example, if one looks at the recent past , India’s GDP growth pattern resembled an “inverted V” even before Covid-19 hit the economy.
  • Historical total market of India in billions of national currency.
  • And for India, the latest numbers are at 70% and has rarely gone upwards of 100%.
  • So, from a dividend yield point of view, Nifty 50 is in still in the overvalued zone.
  • In the calculation, we set T to equal eight years, the approximate length of a full economic cycle.

The Modified Predicted Return line indicates the expected, or predicted annualized return for the next eight years if the current TMC / (GDP + Total Assets of Central Bank) ratio reverts to its recent 10 years mean of 79.24%. The Predicted Return line indicates the expected, or predicted annualized return for the next eight years if the current TMC / GDP ratio reverts to its recent 10 years mean of 88.67%. Based on the modified version, the current TMC / (GDP + Total Assets of Central Bank) Ratio for India is 79.62%. The recent 10 year high was 101.92%; the recent 10 low was 51.59%. If we assume that the ratio will reverse to the recent 10 years mean of 79.24% over the next 8 years, the contribution to expected annual return is %.

Going deeper, we introduce another factor that might also influence the total market cap, which is the Total Asset of Federal Reserve Bank. Just like any other financial statements, the Fed’s balance sheet consists of assets and liabilities. The Fed’s assets consist primarily of government securities and the loans it extends to its regional banks.

Historical Total Assets of Central Bank

Vijayakumar also expects new highs in the Indian market soon before any significant correction. If foreign fund flows are a sign, the market still has lots of ground to cover before attaining a 2021-like liquidity environment. Market expert Ajay Bagga expects fresh all-time highs in November 2022 itself followed by sideways moves and then a fall in February-March 2023 mirroring Wall Street. To put things into perspective, India’s market value-to-GDP has averaged around 81 percent. As you can see, the average is about 75% with a few spikes over 100% and some periods below 50%. GDPU.S. Bureau of Economic Analysis, Gross Domestic Product , retrieved from FRED, Federal Reserve Bank of St. Louis;Used for all historical GDP data.

According to the IMF, in 2019, India became the world’s fifth-largest economy with a nominal GDP of $2.94 trillion overtaking France ($2.71 trillion) and the UK ($2.83 trillion). But the trouble with GDP numbers is that they undergo a series of revisions and the final data comes only with a lag of 2-3 years. In other words, first estimates of national output are ballpark figures and are subjected to revisions, both upwards and downwards. Therefore, it is not neccessary to compare our work with that of Mr Buffet. Pick your 5 favourite companies, get a daily email with all news updates on them.

buffett indicator india 2021

He added that while the mcap to GDP ratio is high, it is lower than other markets like the US which is at 1.99 times. “Compared to the emerging markets average of 0.93 times, India seems a bit overvalued. But India, despite the recent slowdown in the economy, is still expected to be the fastest-growing economy in the world, hence we are not too worried as of now,” he said. If we look at a particular business, the value of the business is determined by how much money this business can make. The growth in the value of the business comes from the growth of the earnings of the business growth. This growth in the business value is reflected as the price appreciation of the company stock if the market recognizes the value, which it does, eventually.

A higher ratio hints at overvaluation meaning that a crash is imminent. The factors of production are in constant competition to increase their rewards and their share of the overall pie. The returns for each factor depend on the prevailing socio-economic conditions, and this share keeps changing as the background conditions evolve.

Global Investment

FPI investments were started reviving after corporate tax rate cut announcements on 20th Sept from earlier 30% to 22%. A positive sentiment has been built in the market due to expected increase in profitability of Indian corporates. Also, Roll-back of Super-Rich tax to revive economic growth and Government’s PSU Divestment drive, FPIs have buffett indicator india 2021 been buying in Indian equity segment. Warren Buffet is highly regarded as one of the most capable value investors. His insight and experience have armed him with the ability to develop his own financial metric, “The Buffet Indicator”. Used to measure the economy, it is the ratio of the stock market capitalisation of a country to its GDP.

For much more analysis and information on the data sources, methodology, and counterpoints to this model, continue reading. This GDP growth is significant as it shows the progress of economic recovery after the onset of the Covid-19 pandemic in 2020. It seems that WOW might not be able to cover its liabilities due in 12 months with its current asset. That means it will be relying on its earning to pay off its current liabilities.

With a flood of unicorns in recent times that will eventually harvest via IPOs and the economic rebound post covid in next 3 years bull market.. At some point in time Reliance Retail , Reliance Jio , Zomato , Paytm Indiamart Intermesh and so on shall find a place in the benchmark index at the expense of Coal India , BPCL , NTPC , Power Grid . Assessment of market valuation through the Nifty PE ratio or market cap to GDP would become totally meaningless at that point in time. Due to the significant amount of liquidity enthused by central banks across the world in the post-COVID world, the valuations of some of the “new-age” businesses have pushed the market cap to GDP ratio higher. We can compute the predicted and actual returns of the India stock market over a given time period, T. In the calculation, we set T to equal eight years, the approximate length of a full economic cycle.


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