Indian stock markets were trading firmly in the green on Wednesday. As Sensex recovered 60,000, Nifty 50 climbed above 17,900. Amid the recent rally, investors are looking to enter the stock market to take advantage of the bullish momentum. For anyone unsure when to buy stocks, Zerodha co-founder Nikhil Kamath shared some advice on Twitter. The entrepreneur told people looking for stock advice to follow the Buffett indicator – the ratio of GDP to US market capitalization.
The so-called Buffett indicator is often used to gauge a country’s stock market valuations. The formula for this indicator is designed in such a way that it can be used for any country, and Kamath wants people to use it to decide when to buy stocks in India. It may be noted that Warren Buffett himself said that no single formula is sufficient to time the stock market.
In order to assess the valuation of the Indian stock markets, one needs to divide the current market capitalization of the Indian stock market by the GDP and know the percentage. If the percentage is between 75 and 90, the market is considered to be correctly valued. Anything above 90 indicates the market is overvalued, and when it drops below 75, it shows the market is undervalued. In the chart shared by Kamath in the tweet, the undervalued zone is shown in light blue and according to the founder of Zerodha, one should “wait for the blue zone and buy anything” because it is the perfect time to buy actions.
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What the Buffett indicator says about the valuation of the Indian stock market
Nikhil Kamath tweeted: “People looking for stock advice, wait for the blue zone and buy anything; stick to astute voters… Everything is cyclical. According to the Motilal Oswal chart shared in the tweet, India’s market cap to GDP ratio for FY23 stands at 103%, indicating that the market is now overvalued. The chart also shows that the market remained significantly undervalued in FY09 and FY20, when the country was badly hit by the coronavirus outbreak. However, since fiscal 2020, the market has remained overvalued. Note that while the Buffett indicator could be a good way for investors to analyze the right time to buy stocks, according to Nikhil Kamath, several analysts and experts believe that this indicator is not a good measure of the Indian stock market. .
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Does the Buffett indicator still work?
Some analysts have even said that the Buffett indicator has already become less relevant in the case of the Indian markets because it only takes into account listed companies and completely ignores the rise in private equity investments which contribute significantly to the GDP. Another criticism of this indicator has been that it only focuses on stock markets and ignores other asset classes like term bank deposits, real estate and debt markets. Therefore, it is not a true representative of the market value of all assets. Analysts also said there are many domestic companies with significant overseas operations that contribute to GDP through exports. Therefore, their growth at valuations above GDP growth is not factored into the Buffet indicator.