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The Warren Buffett Indicator Suggests Indian Equity Market Is Overvalued
Jan 20, 2018


The Market cap to GDP ratio for Indian companies is close to dangerously high levels. While this is still some way off the peak of FY-08, when it had once reached close to 150, it's relatively high.

FY17 saw this ratio reach close to 80. It is also expected to increase further given the moderate growth expectations in India's GDP for FY18. Warren Buffett once considered this as one of the best valuation metrics to gauge the markets.

Past history shows some correlation between the ratio and the share market. 2008 saw Sensex decline by 38%, when this ratio crossed the 100 mark. Also, the market has bounced back sharply when this ratio was low.

The basic assumption in this ratio is that whenever the GDP of the country grows, the market performance will reflect it. Also, when stocks do well, it can be extrapolated to assume the Indian economy is doing well.

The only caveat in this ratio is the number of households involved in the stock market. While in countries like US, 50% of the households are invested in the stock market, India stands at just 2-3%. As a result, when the economy grows, all of the money might not enter the stock market.

But unless there is growth in earnings, it makes sense to tread with caution at current levels.

Data Source: Motilal Oswal, Ace Equity | Equitymaster.com

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