The Indian market is on a dream run with benchmark indices gaining 29 percent in the calendar year 2017 in absolute term. The good news is that the rally is not over yet and in the first 3 weeks of the calendar year 2018, we saw Sensex hitting a record high of 35,000 and Nifty rising above 10,800.
The fierce move which we saw on D-Street pushed the Market cap-to-GDP (MCap) to 8-year high and is now trading above the long-term moving averages, Motilal Oswal said in a report. But, there is nothing to worry about, suggest experts.
India’s share in the world market cap is at 2.3 percent, dropping below its long-term average of 2.4 percent. Over the last 12 months, world market cap has increased 53.5 percent (USD35.7t), while India’s market cap is up 52 percent.
India’s market capitalisation/GDP ratio which now hovers around 100-mark, a valuation indicator which suggests that the market is going into the overvalued zone. Any value above 100 could be described as overvalued.
Thanks to Market Guru, Warren Buffett, who described this ratio as the best single measure of where valuations stand at any given moment” in a December 2001 article for Fortune magazine.
“While the Warren Buffet Indicator with respect to Mcap-to-GDP nearing the 100 level mark for the first time since last 8 years could make investors in Indian Equities nervous but it is way below the 150 levels witnessed in 2007 and by no means the only measure on which we can judge the present bull run,” S. Ranganathan, Head of Research at LKP Securities told Moneycontrol.
Generally, the ratio is a good parameter to compare valuations across various countries. It also provides a relative country valuation across various time periods, but for individual investors, it is not particularly relevant for India, suggest experts.
Companies which are getting listed on the stock exchanges are also pushing the market cap higher for Indian markets even though the GDP growth took a breather. However, it is not the ideal ratio to look at while making investment decisions.
“Market Cap accretion could be a function of secondary as well as the primary market. New companies getting listed also add to a market cap of a country. Large companies such as insurance companies have added significant market capitalisation in recent years in India. It indicates the extent of companies listed in the economy,” Shashank Khade, Director, and Co-founder, Entrust Family Office Investment Advisors told Moneycontrol.
Continuations of reforms as well as strong global and domestic liquidity is likely to keep the momentum going for Indian markets, suggest experts.
“Mcap-to-GDP or Corporate Profits-to-GDP are ‘aggregate’ multiples and should be interpreted accordingly. They aren’t supposed to be interpreted in a manner that allows people to derive valuation conclusions on ‘weighted’ variables such as stock market indices or index earnings,” Piyush Sharma, Co-founder and Co-portfolio manager, Metis Capital told Moneycontrol.
“It is quite apparent that low profitability and stock prices in high revenue industries (Metals and Energy) during commodity down-cycles would disproportionately shrink such aggregate multiples even though most other industries might be in an up-cycle and may be reporting above-average margins or stock prices. These indicators shouldn’t be used to make ‘broad-based’ conclusions,” he said.
India among best-performing markets for CY17: Will the rally continue?
For the calendar year 2017, MSCI EM rose 34 percent while Sensex rallied over 28 percent, Brazil gained 27 percent, Korea was up by 22 percent and Indonesia rallied over 20 percent were the best performers among the key global markets in local currency terms.
Indian equities are trading at 22.7x FY18E earnings, and all key markets continue are trading at a discount to India. However, India’s RoE remains superior to most EMs, an important differentiator for valuation premium.
“Along with ROE’ increasing trend, an accelerating trend growth in earnings is important for valuation premium to sustain and increase. Further, higher Free cash flow yield can also lead to better valuation premiums,” Shashank Khade, Director, and Co-founder, Entrust Family Office Investment Advisors told Moneycontrol.
India deservedly trades at a premium over Asian peers, most of whom don’t have comparable industry breadth, suggest experts. There are multiple levers for growth in our markets which should start showing in the current calendar year.
Most rating agencies see India to clock over 7 percent growth rate in the current calendar year.
“India deserves to trade at a premium. We have stressed upon this previously that not only have cash cycles for Nifty 50 shrunk across the board over past 5 years but accounting clarity has also broadly improved (primarily on account of certain real estate and infrastructure names exiting the index),” said Sharma of Sharma of Metis Capital.
“Fundamentally (at current yields), we see Nifty 50’s fair forward PE to be in the 21x-23x range. As far as momentum is concerned, Nifty is now at levels where incremental growth can only be driven by earnings growth, with multiple expansion being highly unlikely,” he said.