What is Buffett Indicator
Warren Buffett, the real market Guru, had designed Buffett Indicator back in 2001 to indicate whether Market is overvalued or undervalued at any point of time. Buffett Indicator is the proportion of Total Market Capitalization and GDP of the Country. In other terms it is like Price to Sales Ratio for the country as a whole.
What is the Indicator for Fair Value of MarketRatio = Total Market Cap / GDPValuationRemarksRatio < 50%Significantly UndervaluedBuy50% < Ratio < 75%Modestly UndervaluedBuy75% < Ratio < 90%Fair ValuedBuy/Sell90% < Ratio < 115%Modestly OvervaluedSellRatio > 115%Significantly OvervaluedSell
These Values are based on USA Economy, where most of the Economy is in organised sector, whereas in India still significant part of economy is lying in unorganized sector. So, in USA Indicator of around 100 is considered fair. In India considering impact of unorganized sector, indicator of 75 can be considered as fair.
At Present, where India Stands in terms of Buffett Indicator:
At Present, Buffett Indicator for India is just 56 (whereas long term average in India is in the range of 75-80), so as per Buffett Indicator, it may be right time to enter the market, but analysts do not see any value in the market as of now. As per most of analysts, market has not fully incorporated the impact of Covid-19 in its valuation.
Reasons for Their Discontent:
Buffett Indicator of 56 is calculated based on Impacted Stock Market Value (Numerator) but un-impacted Value of GDP (Denominator). Therefore, it is not indicating true valuations of the market. Correct Buffett Indicator will be calculated based on impacted GDP (after considering impact of Covid-19 on GDP).
As per Analysts, there will be negative growth in the Earnings of Corporate in Year 2020-21, therefore with fall in Earning levels, Buffett Indicator at current level of Market will show that it is still Overvalued. (Since, at same level of Numerator, Denominator will fall).
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Source: Various Internet Sources including News Papers, Educational Institutes Resources etc.
Disclaimer: We are presenting Analysis for academic purpose; please consult your financial advisor before taking any financial decision. If you note any discrepancy, please report at firstname.lastname@example.org