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The Buffett Indicator Verdict: India Remains a Stock Pickers Market

Jan 11, 2017

In this issue:
» Construction and Real Estate shine despite demonetization
» Funding blues for E-commerce in India
» Market roundup
» ...and more!

00:00 Chart of the Day

Rohan Pinto, Research analyst

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?

Indian Markets Valuations Still Reasonable


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

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03:25

The Equitymaster annual conference is right around the corner. You are invited to discuss...debate...and analyse the burning issues of today with Vivek Kaul and some of our finest minds at the Equitymaster Conference 2017. Mark your calendar for 21 January 2017. More details here.

03:35

The latest data released on construction and realty sectors have surprised many people. Both these sectors were not much affected by the note ban that saw 86% of the currency notes being invalidated on 8th November. It was widely felt that with the withdrawal of the high-denomination notes from the system, the real estate industry that largely operates on cash to evade taxes would be hit.

But as per the capex data from the Centre for Monitoring Indian Economy, the construction and real estate sector has outperformed most of the other sectors in the December 2016 quarter. In fact, the sector witnessed new projects valued at Rs 90 billion, more than double than that announced in the year-ago quarter and nearly three folds as compared to the preceding September 2016 quarter. Even the share of stalled projects in overall projects has declined from 10.2% in September 2016 quarter to 10.1% in December 2016 quarter.

What explains the divergence in the realty sector when home sales fell sharply in the December quarter? As per property consultant Knight Frank, home sales across eight major cities fell by 41% to 40,936 units whereas launches slumped by 61% to 24,316 units. Most likely construction and realty firms, riding on an anticipated pick-up in demand, did not shelve projects in the December quarter. But the road ahead may be tough for them. Home buyers, in the meantime, may have to still wait for a steep correction in house prices even as banks have cut interest rates sharply to kick-start demand.

04:20

E-commerce companies basking in the success of huge discounts to drive sales seem to be getting a reality check. With many of them bleeding in losses, the days of easy inflow of funds to drive operations may be coming to an end. Sample this, the money raised by internet companies slumped to a three-year low in the December 2016 quarter. The amount of funds raised by them was less than $ 300 million as compared to a peak of $ 2.6 billion raised in the September 2015 quarter. In fact, the share of e-commerce in fund raising has contracted from a peak of 74% in 2014 to 37% in 2016. Digital payments have received a leg-up post demonetisation and this is likely to aid in the growth of e-commerce. But internet companies need to focus on improving their profitability if they have to survive and thrive in this industry.

04:45

After opening in the green, Indian equity markets have been on an uptrend. At the time of writing, BSE Sensex was trading higher by 140 points and NSE-Nifty was trading higher by 50 points. Sectoral indices are trading on a positive note with stocks in the metal sector and banking sector witnessing maximum buying interest.

04:55 Today's Investing Mantra

"If past history was all there was to the game, the richest people would be librarians." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Rohan Pinto (Research Analyst) and Madhu Gupta (Research Analyst).

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