India's Buffett Ratio

A few days back, I had discussed the Buffett Ratio, i.e. the ratio of the stock market capitalisation to the GDP of the country. This post is available here. In that post, I had provided data-points for the U.S. markets, where the Buffett Ratio currently reads at ~ 85%.

I recently came across a data-point of this ratio for India, courtesy equitymaster.com



The value of the Buffett Ratio for India is hovering around 100% as I write this post. As a value investor, I would be a bit concerned, when the value of the stock market's capitalisation crosses the annual income generated by the country's economy. Think of the Buffett Ratio as the P/E of the underlying economy. So, based on the above graph, I would say, the market is valuing India at a P/E > 1.

Now, I know there are a lot of reasons why India's markets are trading at such valuations. The pundits would explain this using buzzwords like GDP Growth, demographic dividend, English speaking population. However, as a value investor, it seems to be a time to be cautious, and to be in selecting stocks.