M-cap-to GDP September 2022

 M-cap-to GDP

The market capitalisation-to-GDP ratio, also called the Buffett indicator, has come off from a high of 112 per cent but is still trading above 107 per cent, suggesting that Indian equities are expensive. As per the indicator, stocks are deemed expensive when the value climbs above the 100 level. For India, the average 10-year m-cap-to-GDP ratio stood at 79 per cent, as much of the economy is unlisted and non-formalised.

The ratio has been volatile, reaching 56 per cent of FY20 GDP in March 2020 from 80 per cent in FY19 and then sharply bouncing back to 112 per cent in FY22. The ratio is now at 107 per cent of estimated FY23 GDP," Motilal Oswal said in a note.

Axis Securities noted that a similar upward earnings momentum, as is being seen today, was witnessed in FY10 earnings immediately after the GFC crisis, leading to the m-cap-to-GDP ratio of 95-98 per cent. With a positive earnings momentum in the current cycle, it sees the ratio improving in the coming times

PE, PB multiples
Nifty50 trades at a 12-month forward PE of 19.6 times, in line with its LPA. But forward P/B at three times is still quoting at a 15 per cent premium to its historical average.

On a trailing basis, the 12-month trailing P/E for the Nifty at 22.8 times is at a 7 per cent premium to its LPA of 21.3 times. At 3.4 times, Nifty’s 12-month trailing P/B also trades above its historical average of 2.9 times at a 17 per cent premium.