Is Nifty blinking red? Find out using these 4 indicators

NEW DELHI: Although flat when seen on a year-to-date basis, India’s flagship index Nifty is a clear showstopper on a global scale, where several bigger indices are caught in a bear grip. But is this outperformance making Nifty super expensive in a worrisome macro environment?

To find this out, let’s have a look at four fundamental market valuation parameters:

Bond Equity Earnings Yield Ratio (BEER), which is calculated by dividing the benchmark 10-year bond yield by the earnings yield of the stock market or the benchmark index, is now trading above its long-term average. It indicates that the equity market is slightly expensive at current levels as against the bond market.

“Factoring in the rate hike expectation by the RBI, the long-term bond yields have gone up 60 bps in the last 6 months. After the recent correction, some cool-off was seen in the BEER ratio,” Axis Securities said.

Buffett Indicator
The market cap-to-GDP ratio, which is also known as the Warren Buffett Indicator, stands at 104% (of FY23E GDP), above its long-term average of 81%. “India’s market capitalization-to-GDP ratio has been volatile, at 56% (of FY20 GDP) in Mar’20 from 80% in FY19, but bounces back sharply to 112% in FY22,” domestic brokerage


With a positive earnings momentum in the current cycle, analysts say India is likely to see higher levels of m-cap-to-GDP ratio in the upcoming quarters.

Nifty PE/PB
Nifty is currently trading at 18.4x on 12-month forward PE, at 1std (standard deviation) to its long-term average while it is trading below 1stdev on a 12m-forward PB. The current valuation looks attractive (equivalent to the 5-year average) as risk-reward has significantly improved in the last three months with the earnings expectation for FY23 remaining intact, Axis said.

Relative valuation
Currently, FTSE India is trading at a 91% premium to the EM Index as against a 39% average premium. The divergence is likely to continue on account of robust economic growth vs other EM countries, strong earnings outlook, robust demand across the sector, banking sector being in better shape, and private capex cycle expectation, the brokerage said.

“Our market valuation index has retraced back to 1std after the recent correction. Current valuations provide a good entry point for long-term investors. At current levels, stock picking and sector rotation would be keys to achieving outperformance,” Axis said.

Kotak Securities, which finds the broader market valuations rich, said opportunities arising from market correction can be used to add quality stocks with an attractive valuation from a long-term investment perspective.

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