Despite a steep fall in domestic benchmarks Sensex and Nifty, a couple of indicators including the legendary investor Warren Buffett's 'Golden indicator' suggest Indian market still is expensive and there is more room for correction. Buffett indicator, named after Warren Buffett, suggests that the market capitalisation (m-cap) of listed companies in a country should not exceed the country's own GDP. If it does, the market is deemed expensive.
In the case of India, m-cap to GDP stands at 120 per cent. This is against an average of 85 per cent (of GDP) since FY07. The m-cap-to-GDP ratio, though, has dropped from a high of 132 per cent in FY24.
"India’s market capitalisation-to-GDP ratio has been volatile, plummeting to 57 per cent (of FY20 GDP) in March 2020 from 80 per cent in FY19 and then sharply reviving to 132 per cent in FY24. It is now at 120 per cent of FY25E GDP (9.2 per cent YoY), above its long-term average of 85 per cent," MOFSL said.
This has been the case even as India has been the worst-performing major markets globally of late. Against gains of 4 per cent for Germany, 2 per cent for China, 2 per cent for the UK and 1 per cent for Korea in local currency terms last month, the Indian market was down 6 per cent in February.
India’s share of the global market cap has also fallen to 3.6 per cent, a 16-month low. Despite this, the share is above its historical average of 2.7 per cent.
The market correction has coincided with a slowdown in earnings growth, as the Nifty-50 has managed only 4 per cent PAT growth in 9MFY25, following a healthy 20 per cent CAGR during FY20-24.
"The expectations for FY26 corporate earnings are still somewhat elevated, in our opinion, given the underlying macro-micro backdrop and are thus ripe for further downgrades," MOFSL said.
The recent correction in broader markets factors in some of the potential disappointments in earnings ahead, the brokerage said even as it feels the valuations for midcaps and smallcaps are still expensive vis-à-vis their history as well as against Nifty.
"We continue to remain biased toward largecaps with a 76 per cent allocation in our model portfolio. We are OW on Consumption, BFSI, IT, Industrials, Healthcare, and Real Estate, while we are UW on Oil & Gas, Cement, Automobiles, and Metals," it said.
Axis Securities said the current market environment exhibits signs of excessive pessimism and fear – not without reason - which are often precursors to durable bottoms.
"While a clear bullish trigger is yet to emerge (this is critical), historical patterns, technical indicators, and sectoral valuations suggest that the market is nearing a medium-term bottom. Therefore, we would advise investors to allocate some long-term money when Nifty is between 21,700- 22,000. While most of us can’t catch the exact top and bottom, prudent investing is about cashing in on opportunities, especially when sentiment is so one-sided. One such opportunity is now," it said.