Shiller price index

Buffett and Shiller share concern over Indian stocks

India’s economy is expected to grow 9.2 percent in FY22, according to the National Statistical Office (NSO) first estimate of gross domestic product (GDP) growth for the fiscal year. This figure is lower than the Reserve Bank of India’s forecast of 9.5% and indicates a slowdown in the country’s growth in the second half of fiscal year 22.

However, the Indian stock market is not disturbed. The new year has started on an upbeat note with the benchmark Nifty50 up 3.7% so far, breaking the 18,000 mark on Monday. Unsurprisingly, the valuation of the Indian stock market measured using Warren Buffett’s market cap-to-GDP ratio has exceeded its historical average. “It’s probably the best measure of where valuations are at any given time,” Buffett said. For FY 22, the reading stands at 119%, ahead of its long-term average of 79%, according to the latest data from Motilal Oswal Financial Services Ltd. This ratio is the highest in at least a decade.

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In the land of la-la

Valuations are expensive, even based on the Shiller indicator, which is the Cyclically Adjusted Price / Earnings Ratio (CAPE). It is named after Nobel Prize winning economist Robert Shiller. This is calculated by dividing the price of the general stock index by the inflation-adjusted average earnings of that index over a five-year period. A high CAPE ratio means stocks are expensive. On this metric, Indian stocks are 33.2 times overvalued, according to data provided by ICICI Securities Ltd.

The MSCI India Index trades at a one-year futures PE of around 22 times, a steep premium over the 12 times PE multiple of the MSCI Asia ex-Japan, according to Bloomberg data.

There are many downside risks, making it difficult to justify these expensive valuations. Interest rate hikes by global central banks and the end of stimulus measures are dampening sentiment. Access to cheap liquidity had boosted stock markets even during the height of the pandemic. In addition, the recent increase in covid cases is a threat. All eyes are now on corporate earnings for the December quarter (Q3FY22) of India Inc. Even here, analysts warn of a patchy recovery, especially in operating margins, as some companies are able to raise their prices faster than others. The debatable question is whether the recovery in demand in the third quarter will continue amid the uncertainty caused by Omicron causing disruption.

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