Warren Buffet: Buffett’s favourite market indicator hints a major selloff’s in the making

Mumbai: The global market cap to gross domestic product (GDP) ratio has crossed 100 per cent for the first time since January this year indicating investor bullishness and overvaluation due to fiscal spending and central bank money printing.

The ratio, which is a favourite of billionaire investor Warren Buffet, is about 64 per cent higher than the historical average. The MSCI World index is now trading 24 times its FY21 estimated earnings compared to its long-term average of 23.7. The m-cap to GDP ratio of the US has substantially increased from 114 per cent a year ago to 169 per cent now.

In the past, global markets have corrected sharply in three such instances of the ratio crossing 100 per cent. The first was in 2000, followed by 2008 and 2018.


But countries like China, India, France and Germany have seen a decline in m-cap to GDP ratio in the last one year. Buffett has repeatedly stressed that the percentage of total m-cap relative to GDP is probably the best single measure of where valuations stand.

India’s m-cap to GDP ratio, now 69 per cent, is near its historical averages, suggesting Indian stocks beyond the top 10 are fairly valued, said analysts. It was 92 per cent a year ago and 134 per cent three years ago. “With recent rally, the rewards to risk ratio has moderated though India’s total market cap to GDP, which is trading at its long-term average, shows the market is fairly valued,” said Naveen Kulkarni, chief investment officer, Axis Securities. “Except for the BFSI sector, there is limited valuation comfort across sectors but BFSI has balance sheet challenges.”

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