Amid fears of a global slowdown, India is among a few major stock markets that delivered positive returns in 2022 so far. Due to this, India’s valuations vis-à-vis emerging markets have jumped to historic high and its market capitalisation (m-cap) as a percentage of the world market cap is also at a record level. India’s m-cap to GDP ratio, also known as Buffett indicator, is trading above the 100 mark, which is deemed expensive.
India’s valuations, meanwhile, have remained largely in line with its own historic averages, suggesting the market is largely ignoring global concerns so far. Upside remains capped in the near term, said brokerages.
Buffett indicator
This indicator, named after legendary investor Warren Buffett, suggests that the m-cap of listed companies in a country should not exceed the country’s own GDP. If it does, the market is deemed expensive.
The indicator value for India stood at 105 level as of October end, based on FY23 projected nominal GDP levels. This is even as the 12-year average indicator value for India stands at only 79 level, suggesting the domestic stocks are overvalued.
The low historic average for India could be due to the fact that India still has a large unorganised sector, which is not reflected in India’s listed market space.
Axis Securities said an upward earnings momentum was witnessed in FY10 earnings immediately after the global financial crisis, leading to the Buffet indicator rising to 95-98 per cent level. With a positive earnings momentum in the current cycle, it sees higher levels of the m-cap to GDP ratio in the coming quarters.
BEER ratio
Bond-earnings yield ratio or BEER ratio suggests the attractiveness of equities against bonds. If the ratio is below 1, equity investments are deemed inexpensive, attractive. If it is more than 1, equity investment is deemed expensive, unattractive.
The ratio is calculated by dividing the benchmark 10-year bond yield by the earnings yield of the stock market or the benchmark index. Earning yield is defined here by 1/forward PE multiple.
The ratio at present stands at 1.4, which is even higher than India’s own long-term average of 1.2.
Factoring in the rate hike expectation by the RBI, the long-term bond yields have gone up 40 bps in the last 5 months. While some cool-off was seen in the BEER ratio recently, it is now trading above its LTA, indicating a slightly expensive.
India vs EMs
Over the last 12 months, the MSCI India index (up 2 per cent) has outperformed the MSCI EM index (down 33 per cent), Motilal Oswal said in its monthly Bulls & Bears note. Domestic indices are up 4 per cent so far this year in rupee terms and are down 7 per cent in dollar terms, still far outperforming the MSCI EM pack.
In fact, MSCI India’s 10-year return stands at 11.2 per cent compounded annually against MSCI EM’s negative 1.6 per cent return.
In P/E terms, the MSCI India index is trading at a 155 per cent premium to the MSCI EM index, a historic high. This is against the historical average premium of 64 per cent!
India’s share of world m-cap
India’s m-cap now account of 3.5 per cent of the all listed companies in the world. This is an all-time high. The country enjoyed a m-cap percentage of 3.3 per cent somewhere in 2010.
US m-cap share stands at 45 per cent of the world’s m-cap, China’s 9.6 per cent, Japan 5.3 per cent and Hong Kong 4.3 per cent.
The historical average share for India in the world m-cap stands at 2.5 per cent.
Also, global m-cap declined 22 per cent or nearly $26.4 trillion in the last 12 months, but India’s m-cap has declined only 2.2 per cent during the same period.
PE, PBV multiples
Nifty traded at a 12-month forward PE of 19.6 times as of October end, which was near its long-term average of of 19.7 times. On price to book value (PBV) basis, it traded at 3.1 times, which was at a 15 per cent premium to its historical average.
The 12-month trailing P/E for the Nifty at 23 times, was at a 7 per cent premium to its LPA of 21.4 times.
At 3.4 times, Nifty’s 12-month trailing PBV was above its historical average of 2.9 times – at a 18 per cent premium.
What do analysts say?
Motilal Oswal said Nifty may offer limited upside in the near term and that the upside from here will be a function of stability in global and local macros and continued earnings delivery against expectations.
In its model portfolio, it maintained its overweight stance on BFSI, auto, Consumer and IT sectors while it maintained its underweight stance on energy, pharma and utilities.
Phillip Capital in a strategy note said it has a ‘Neutral’ stance on Indian equities. Downside risk will open, it said, as global monetary tightening continues, triggering global growth slowdown.
“In case global slowdown is avoided, India equities will trend higher. However, until that clarity emerges, we expect Nifty to be range-bound. FY23 was always expected to be a tough year – it is panning out in-line. We retain our March 2023-September 2023 target at 17,800-18,800. While we expect India’s outperformance to sustain due to extremely favourable long-term fundamentals as compared to any other economy; near term trends will likely be soft owing to higher interest rates, tight liquidity and weakening rupee,” it said.