Buffett Indicator falls below 100%. Is Nifty blinking buy now?

With headline index Nifty having dropped around 6% from its 52-week high level of 18,888, India’s market capitalisation-to-GDP ratio, also known as the Buffett Indicator, has now dropped well below the 100% mark.

Considering India's nominal FY23 GDP at Rs 273 trillion, India’s total market cap to GDP is now trading at 92%. "At FY24 projected nominal GDP levels, Mcap/GDP ratio translated into 84% (fairly valued). As per the Union Budget 2023-24, the FY24 GDP assumption is pegged at Rs 301 trillion," Axis Securities said.

In FY21, the Buffett Indicator, named after legendary investor Warren Buffett, stood at 104% while in FY22 the figure stood at 112%. However, the indicator remains much above its long-term average of about 79%.


While there is no consensus on this, stocks are often deemed expensive when the value climbs above 100 level.

Let's also look at 3 other indicators to find out how expensive is Nifty at this stage.

BEER ratio
BEER ratio is a metric used to evaluate the relationship between bond yields and earnings yield, which is the inverse of the price-earnings (P/E) multiple.

"Factoring in the rate hike expectation by the RBI, the long-term bond yields have gone up 97bps since January 2022. After the recent correction, some cool-off was seen in the BEER ratio. However, it is now trading above its long term average, indicating a slightly expensive equity market at current levels as against the bond market," Axis said.

PE ratio
Nifty is currently trading at 12-month trailing PE at 21.5x, 7% higher than its long-term average of 20x. On a 12-month forward PE basis, the index is currently trading at 17.7x which is below its average of 18.4x.

PB ratio
At 3.2x, the 12-month trailing price-to-book (PB) value of Nifty was 10% above its historical average of 2.9x. the 12-month forward PB was at a premium of 7% to the Nifty’s historical average of 2.6x.

What should investors do?
While valuing Nifty at 7.5% discount to 10-year average PE (20.8x) with Dec24 EPS of Rs 1,081, domestic brokerage Prabhudas Lilladher has arrived at a 12-month Nifty target of 20,801 in the base case scenario.

Julius Baer, on the other hand, sees a 17% upside in the next 13 months and has a 3-month Sensex target of 70,000.

"Over the last four months, India’s valuation premium versus emerging market (EM) peers retraced sharply from a high of 120% in November 2022 to its 10-year average of 70%, as the Chinese markets bounced back over 50% during the same period. We believe that incremental foreign selling will decrease going forward due to valuation comfort, superior earnings growth versus EM peers, and the lowest decile foreign ownership," said Mark Matthews of Julius Baer.

Analysts say current valuations provide a good entry point for long-term investors.

Prabhudas remains overweight on auto, banks, IT services, capital goods and healthcare.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)