Buffett indicator: Watch out! Buffett indicator for India sending wrong signals



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NEW DELHI: Is Buffett’s indicator sending a false alarm? Analysts feel that way.

The market capitalization to GDP ratio, also known as the Buffett indicator, for India has breached its Global Financial Crisis (GFC) low of 56, and is now trading just above the 2005 level of 52.

Named after legendary investor Warren Buffett, the indicator is defined as the total value of a stock market relative to the economy’s GDP.

For a developing country like India, an indicator value below 70 is generally seen as a sign of emerging value in the market. But in the current scenario, where strong economic pain is likely to come, analysts still don’t see value in the market.

“Based on our analysis of consensus earnings estimates for Nifty components, we believe that Dalal Street has not yet taken into account the impact of Covid-19 on corporate earnings,” said HDFC Institutional Equities.

The brokerage said the Nifty EPS consensus estimate for fiscal year 21 has been reduced by 15 percent, translating to 13 percent growth. “This is optimistic, given the intensity and scope of the blockade, FY21 will be a year of negative earnings growth,” the brokerage said.

Kotak Institutional Equities considers the risk-reward balance for the Indian market to be unfavorable after the sharp rise in share prices in April.

“The price and value gap has been closed in some stocks, and is less clear in others due to high economic and earnings uncertainty,” the brokerage said.

In final terms, around 60 percent of Nifty50’s shares, including Reliance Industries, Britannia, Asian Paints, Nestle and Hindustan Unilever, are trading above their long-term averages, data provided by Motilal Oswal Securities showed. Nifty is trading at 20.4 times its 12-month earnings compared to an average of 19.6 times.

“The earnings we estimated for fiscal year 21 are postponed until fiscal year 22. Market participants are already taking fiscal year 21 as a year of amortization. We are now making investment decisions based on fiscal year 2011 numbers.” says Atul Bhole, VP-Investments, DSP Investment Managers

There is great uncertainty about what market capitalization is capturing, especially after April’s 14 percent recovery in equity benchmarks as economic output has been severely affected in the past 45 days due to to continuous blocking.

The blockade, the extension of which will be reviewed before May 17, is expected to have a major impact on consumer behavior and affect India Inc for at least two quarters.

“Our current position is one of caution after the recent recovery to 9,800 odd levels as Nifty is currently trading at expensive valuations. We will be positive in the event of a reasonable cure for Covid-19, a significant fiscal stimulus from the Indian government, a decrease in Covid infections in India, and at least a correction of the index at some point, ”said Phillip Capital in a note.

The 12-month PE for Nifty now stands at 19.3, higher than the 10-year average of 18.6 times. The leading multiples were located around the 14 mark during the 2012-2013 sell-off.

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