NewKerala.com

Indian Stocks: Less Expensive Than US Despite High Valuations, Says Report

A report by Axis Direct indicates that while Indian equity markets are trading above their long-term average on the market capitalization to GDP metric, they remain less expensive than US markets. The ratio stands at 137% currently but moderates to a fairly valued 125% when projected FY26 nominal GDP is considered. Supporting factors include a correction in bond yields and a balanced Bond to Equity Earnings Yield Ratio (BEER). The analysis draws parallels to post-crisis FY10, suggesting higher Mcap-to-GDP levels could be sustained by positive earnings momentum.

Key Points: India vs US Stock Valuations: Mcap-to-GDP Analysis

  • India's Mcap/GDP at 137%
  • Moderates to 125% with FY26 GDP
  • Bond yields corrected 26 bps
  • BEER ratio indicates balanced valuations
2 min read

Despite elevated valuations, Indian stock markets less expensive than US: Report

A report finds Indian equity markets less expensive than the US based on market cap to GDP, despite trading above long-term averages, supported by earnings and growth.

"In terms of Mcap to GDP, India Stands Less Expensive than the US Market - Axis Direct Report"

Mumbai, January 2

The domestic equity markets appear less expensive than their US counterparts when compared on the market capitalisation to GDP metric, according to a report by Axis Direct.

The report highlighted that while Indian markets are trading above their long-term average on this valuation indicator, they remain fairly valued when seen in the context of earnings momentum, bond yield trends and projected economic growth.

It stated, "In terms of Mcap to GDP, India Stands Less Expensive than the US Market".

The report noted that India's total market capitalisation to GDP is currently trading at 137 per cent. This level is above the long-term average, which has been recalibrated after the government released the revised FY25 GDP estimate of Rs 324 trillion on February 1, 2025.

However, when the projected nominal GDP for FY26 is taken into account, the Mcap-to-GDP ratio moderates to around 125 per cent, which the report describes as fairly valued.

As per the Union Budget 2025-26, the FY26 GDP assumption has been pegged at Rs 356.97 trillion.

The report also pointed to developments in the bond market to support its assessment. It added Indian bond yields have corrected by 26 basis points since November 2024, which marked the start of the US Federal Reserve's rate cut cycle.

The correction in bond yields is attributed to multiple factors, including expectations of a consumption boost, fiscal consolidation outlined in the Union Budget, and the possibility of rate cuts by the Reserve Bank of India.

Following the recent correction in equity markets, the Bond to Equity Earnings Yield Ratio (BEER) is now trading slightly above its long-term average, indicating relatively balanced valuations between bonds and equities.

From a historical perspective, the report draws parallels with earlier cycles. It highlights that a similar phase of strong upward earnings momentum was witnessed in FY10, immediately after the global financial crisis.

During that period, the Market Cap-to-GDP ratio had risen to the range of 95-98 per cent. The report said that with positive earnings momentum in the current cycle as well, higher Mcap-to-GDP ratio levels could be seen in the upcoming quarters.

So the report outlined that despite being above long-term averages, Indian equity valuations remain reasonable when adjusted for growth expectations and earnings strength, and compare favourably with the US market on the Mcap-to-GDP metric.

- ANI

Share this article:

Reader Comments

S
Sarah B
Interesting analysis. As a long-term investor, the BEER ratio being balanced is a good sign. It suggests the market isn't in a bubble and there's still room for growth, especially with potential RBI rate cuts on the horizon.
V
Vikram M
Mcap-to-GDP at 137% sounds very high, no? Even if it moderates to 125%, it feels expensive for the common retail investor. SIPs are getting costlier every month. Hope the earnings momentum actually materializes.
P
Priya S
The comparison with FY10 post-GFC is apt. Back then, markets recovered strongly on earnings. If we see similar momentum now, it justifies the valuations. Key is whether corporate profits keep up with the GDP projections.
R
Rohit P
Bond yield correction is a big positive. Lower yields make equities more attractive. Combined with fiscal consolidation from the budget, it creates a solid foundation. Feeling bullish for the long term! 💹
M
Michael C
While the report is optimistic, a word of caution. "Fairly valued" doesn't mean cheap. New investors should still focus on quality stocks and avoid the frenzy in small and mid-caps. Do your own research.

We welcome thoughtful discussions from our readers. Please keep comments respectful and on-topic.

Leave a Comment

Minimum 50 characters 0/50