Buying fear: This Warren Buffett indicator hints a bottom, but are we there yet?

The Indian market has fallen nearly 30 percent from its all-time high seen in January, which indicates we are now in a bear market. But, is it time to buy the fear? Maybe not. Warren Buffett once said, "Be fearful when others are greedy and greedy when others are fearful". One thing is certain that there is a lot of fear in equity markets across the globe. Institutional investors are selling equities to either raise cash or fund margin calls. But, can we say that we have made a bottom? And, this would be the best time to invest? Experts feel that investors should deploy a staggered approach while investing in equity markets because the slide could still continue. The COVID-19 outbreak which is a global pandemic is likely to have severe economic fallout for many countries,xc including India. Global rating agencies have warned that the world economy is likely to slip into a recession in 2020. “Given the uncertainty, one may not be in a full “Greed-on” mode, but certainly it is time to loosen the purse strings. In numerical terms, valuations are at least 10 percent more favourable vis-a-vis 2 weeks ago,” Rakesh Parekh, Head - Portfolio Management, JM Financial Services told Moneycontrol News. “Globally, we have gone through multiple viruses scares over the last two decades. And, the experience has been that while business disruptions lead to near-term pressure on earnings and cash flows, good quality solid businesses adjust and rebound quickly as things begin to settle down. Since stocks are cheaper, it is a good idea to start deploying cash,” he said. Where is the bottom? Yes, it is time to buy the fear but in a staggered way because the bottom could still be some time away. Although, India’s market capitalisation/GDP ratio has declined swiftly from 79 percent as on FY19 to 54 percent (FY20E GDP) – much below its long-term average of 75 percent and closer to the levels last seen during FY05 and FY09 – makes it attractive. The Nifty is trading at a 12-month forward RoE of 15 percent, above its long-term average of 14.5 percent, Motilal Oswal said in a note. Warren Buffett described this ratio (Market cap to GDP ratio) as the "best single measure" of where valuations stand at any given moment in one of his articles back in 2001 with Fortune magazine. The ratio acts as a good barometer when it comes to studying market valuations, but experts differ that we have made a bottom – although, we might be trading at levels last seen during the 2008 financial crisis. The ratio is at its lowest level since FY06. “The current situation is not very promising as we can see a continuous rise in COVID cases and it is difficult to say if the bottom is here or not,” Gaurav Garg, Head of Research at CapitalVia Global Research Limited- Investment Advisor told Moneycontrol. “Once this pandemic issue resolves, economic activity can be seen gaining momentum basically due to increased consumption and therefore a judicious investment can be made for next 5 years,” he said. This ratio acts as one of the indicators to channelize investors to remain invested at current levels. But, one may note that these indicators do not assist in the short term timing of the market and investors should not just jump and buy solely on the fact that the ratio is so attractive, suggest expert. The other reason which makes experts believe that the bottom could be some time away is the fact that we have fallen just 30 percent in 2 months while history suggests that bottom formation has taken anywhere between 10-27 months. “The final bottom in the four previous falls took 10-27 months versus less than three months in the ongoing fall,” said a CLSA report. VK Sharma, Head PCG & Capital Markets Strategy, HDFC Securities told that the market cap to GDP ratio today is around 0.53, which matches that of December end 2008. “While the Nifty, in the current bear market has fallen 39.57 percent to its low, in 2008 it had fallen as much as 61 percent,” he said. Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.