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Indian Markets Valuations Still Reasonable
Jan 11, 2017

The ratio has certain limitations in telling you what you need to know. Still, it is probably the best single measure of where valuations stand at any given moment. - Warren Buffett

The Buffett Indicator, the ratio made famous in a 2001 Fortune magazine article, is Buffett's go-to metric to evaluate the broader markets.

We find it useful too.

The ratio measures the market value of all publicly traded securities as a percentage of the country's GDP - i.e. market cap to GDP.

The rationale behind using this crude yet effective metric is simple: Over the long term, the returns of a broad group of securities should be in line with the country's nominal long-term growth rate.

Where does this indicator stand for Indian markets?

The market cap to GDP ratio over the past fifteen years has fluctuated from a low of 20% in 2003 to a high of 91% in 2008. It's currently at 65%.

The nominal GDP for India has grown 13-14% annually since 2003 with a slight dip in the past few years. Meanwhile, market cap has seen wild swings of +169% in 2004 to -40% in 2008.

What is a good level to Buy? Buffett provides some answers:

    If the percentage relationship falls to the 70% or 80% area, buying stocks is likely to work very well for you. If the ratio approaches 200%--as it did in 1999 and a part of 2000--you are playing with fire.

But you see, Buffett took into consideration long term average value for the US markets. Similarly, we must also look at our own historical long term average of this ratio for India.

The long term average Market cap to GDP ratio for the Indian markets since 2002 stands at 60 percent. This ratio currently stands at 65 percent, though higher than the long term average. However, much below the highs seen in 2008.

At present levels, the broader markets seem to be evenly poised. Neither too expensive nor too compelling.

In such a market, thoroughly analysing every business and making selective stock bets is an approach that will help one make outsized returns.

In test cricket parlance, when batting on a difficult wicket one needs to patiently bat out an inning and look to keep wickets intact.

And when opportunity presents itself, take full advantage of the wickets in hand to consolidate and take the game away from the opposition.

A stock pickers market

Mr Market provides you with stock quotes every day. It is swayed by market sentiments in the short run. However, over the long run, it is the fundamental value that drives the stock.

The ValuePro team aims to find selective stocks to its subscribers that are fundamentally strong, and are also trading at a discount to its intrinsic value. One such attractively priced stock from the healthcare industry was recently recommended by the team. If you haven't read the report already, I would urge you to read the complete report here. (Subscription Required)

Data Source: BSE, IMF, Equitymaster

This Chart Of The Day was published in The 5 Minute WrapUp - The Buffett Indicator Verdict: India Remains a Stock Pickers Market

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