Warren Buffett's favourite chart says 'have no fear' to India stock bull

Sensex's 17% gain in 2017 means India is now one of the most expensive Asian markets

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 favourite valuation indicator — market capitalisation to gross domestic product. By that measure, the S&P BSE Sensex’s valuation is still more than 40 per cent short of its high reached shortly before the global financial crisis.

“The ratio is way below where it was during the 2007 peak,” Agrawal, who’s been attending Buffett’s annual meetings for the past two decades, said in an interview in Mumbai. “We’re definitely not over the top.”

The Sensex’s 17 per cent gain this year through Thursday means India is now one of the most expensive Asian markets when measured by price to earnings. The rally sent the value of Indian equities close to $2 trillion, or 95 per cent of the country’s GDP. But back in 2007, it rose to as high as 170 per cent, while at a more recent peak in 2010 it stood at 122 per cent. The gauge rose 0.1 per cent on Friday.

If Buffett’s favourite metric isn't flashing a warning signal just yet, why hasn't he invested in Indian companies?

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 US investor says stocks are expensive if the metric stands above 100 per cent of GDP, while traders say readings of 75 per cent to 90 per cent represent fair value. In India’s case, while equities are surging, so is the economy: it expanded 7.1 per cent in the year ended March.

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.

“A 5 to 15 per cent correction can always happen without any reason but it will happen when nobody is expecting it,” he said.

If Buffett’s favourite metric isn't flashing a warning signal just yet, why hasn't he invested in Indian companies?

Buffett said in an interview with ET Now television after his annual meeting in Omaha last month that if there was a good target he’d “be there tomorrow.” He said the business would need to be large and for sale.

“He says ‘my gun is loaded to hunt elephants’ — he is sitting on close to $100 billion,” Agrawal said. “There are lot of companies in India that fit his investment criteria but where do you get him the size?”

© Bloomberg