Buffett Indicator: Is the Indian Market Overvalued ?
The following article analyses the valuation & expected returns of the Indian Capital Market (Share Market) based on the Buffett Indicator.
“ If you want to know the future, look at the past ”
— by Albert Einstein
Itis important to note that, of course, there is no single metric that describes the entire market. However, the Buffett indicator is a ratio commonly used by most professionals in the field to analyze stock market valuation.
Buffett’s indicator was originally the ratio of the overall estimate of the US stock market to GDP. Named after Warren Buffett, who calls this relationship “the most glaring measure by which values stand at all times.”
In this article, we deal with the same analysis for the Indian equity market
Historical GDP Growth
India’s GDP has grown at current local prices by 5.85% per year for the past 8 years. This growth rate includes the impact of price inflation and GDP growth is not real. Current annual gross domestic product: $3,100 billion or INR 23,215 trillion in local currency.
Historical Indian Equity Return
To analyze the performance of the equity returns, we are considering BSE SENSEX. The Bombay Stock Exchange SENSEX, also known as BSE 30, is a market capitalization-weighted index of 30 established and financially sound companies listed on the Bombay Stock Exchange. Therefore, it will provide us with a fair estimate of the long-term performance of the Indian equity markets.
Observations for Indian Equity Market
India’s current ratio of market capitalization to GDP is 102.99%. The highest value over the past decade was 117.03%. The most recent low of 10 was 54.47%. Assuming this ratio reverses over the next eight years from an average of 79.82% over the past decade, the projected contribution to annual income is -3.13%.
Further based on the Modified version, the current TMC/(GDP + central bank net assets) ratio is 88.92%. The highest figure in the past decade was 98.94%. The last 10 lows were 48.43%. Assuming that this ratio reverses to a 10-year moving average of 71.28% over the next eight years, the expected annualized return share is -2.73.
Below is a detailed historical chart of the Original TMC / GDP ratio and the Modified TMC / Ratio (GDP + total central bank assets).
Based on the historical valuation, the market valuation is divided into 5 areas.
Based on the Modified historical valuation, the market valuation is divided into 5 areas
Conclusion:
Under the Buffett Core Index, the Indian stock market is expected to post annual returns of 7.0% over the next few years. This is due to the contribution of economic growth to the current local value: 5.85%, dividends: 4.31%, and the valuation change to average -3.13%.
In the modified model, contributions from economic growth and dividend yield remain the same, but the valuations reverse and range on average to -2.73%. Thus, the Indian stock market is expected to post annual returns of 7.4% over the next few years.
Below is a detailed chart shows India’s expected Equity market returns, against other economies:
P.S. : Thanks for staying so far. Please note —
- Credit for all the Charts & Images to https://www.gurufocus.com/
- In our next article, we will explore the Indian Capital Market Outlook, in terms of top-down analysis. (here)
Hope this article has added some value. Please like & share your comments/Observations.
