According to the National Statistical Office (NSO)’s first estimate of Gross Domestic Product (GDP) growth for the fiscal year, the Indian economy is expected to grow at 9.2% in FY12. This is lower than the Reserve Bank of India’s forecast of 9.5% and points to slower growth for the country in the second half of FY22.
However, the Indian stock market is not upset. The new year has started on an upbeat note, with the benchmark Nifty 50 index rising 3.7% so far, crossing the 18,000-mark on Monday. Unsurprisingly, the valuation of the Indian equity market, as measured using Warren Buffett’s market capitalization-to-GDP ratio, has exceeded its historical average. According to Buffett, “It is probably the best measure of where valuations stand at any given moment.” The latest data from Motilal Oswal Financial Services Ltd shows that for FY22, the reading is at 119%, ahead of its long-term average of 79%. This ratio is the highest in at least a decade.
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Valuations are also expensive based on the Schiller indicator, which is a cyclically adjusted price-to-earnings (CAPE) ratio. It is named after Nobel-winning economist Robert Schiller. It is calculated by dividing the price of a broad stock market index by the average inflation-adjusted earnings of that index over a five-year period. A high CAPE ratio means stocks are expensive. On this parameter, Indian shares are valued at 33.2 times, as per data provided by ICICI Securities Ltd.
According to data from Bloomberg, the MSCI India index is trading at around 22x the one-year forward PE, much higher than the 12x PE multiple of former MSCI Asia in Japan.
There are a lot of downside risks, making these expensive valuations difficult to justify. The sentiment has weakened on the back of interest rate hikes and slashing of stimulus by global central banks. Access to cheap liquidity had fueled the stock markets even at the peak of the pandemic. Also, the recent increase in the cases of covid is a threat. All eyes are now on the December quarter (Q3 of FY22) of the Indian industry. Here too, analysts warn of uneven recovery, especially on operating margins, as some companies have been able to hike prices faster than others. The contentious question is whether Q3 demand will continue to improve against a backdrop of disruption caused by Omicron-led uncertainty.
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