India’s booming stock market is now worth almost as much as the nation’s economy. But that’s not unsettling Raamdeo Agrawal, the broker turned stock picker who built a multi-billion dollar financial firm using the tenets of Warren Buffett.
While the benchmark index has set multiple records this year, Agrawal says it’s still relatively cheap by the sage of Omaha’s favorite valuation indicator — market capitalization to gross domestic product. By that measure, the S&P BSE Sensex’s valuation is still more than 40 percent short of its high reached shortly before the global financial crisis.
The Sensex’s 17 per cent gain this year means India is now one of the most expensive Asian markets when measured by price to earnings.
In a December 2001 article for Fortune magazine, Buffett described the ratio as “probably the best single measure of where valuations stand at any given moment.” The U.S. investor says stocks are expensive if the metric stands above 100 percent of GDP, while traders say readings of 75 percent to 90 percent represent fair value.
Domestic and foreign funds have poured a combined $13.5 billion into Indian shares this year after a decisive win for Prime Minister Narendra Modi’s party in state polls in March spurred bets for more reforms. The Sensex is Asia’s best performer this year.
Agrawal, who’s seen many boom and bust cycles over three decades investing in Indian equities, says the market will experience a drop before continuing its uptrend.