Recently nifty crossed the 14000 mark for the first time in history.
For the past few months, we are experiencing a rally which we have seen never before.
Since the markets are going up every day, an obvious question arises in mind that whether the markets are overvalued, or the markets will move further up.
If we look at the market capitalization of our markets, it is also rising as the markets are at an all-time high.
Once we try to understand the buffet indicator, which is Market cap to GDP, it suggests that if this number is below 100%, then the markets are fairly valued.
But if the number is greater than 100%, it shows that the markets might be overvalued.
Our market capitalization is currently exceeding the GDP value, so we are at more than 100% value.
In US markets, the market cap to GDP percentage is around 140% which suggests a highly overvalued market.
In US markets, many companies' market capitalization has exceeded the overall market cap of the Indian stock market combined.
In India historically, the Market cap to GDP percentage has been around 70-75%. So we are trading above our average prices.
Analysts in the markets suggest not considering FY 2021 year in the calculation and trying to analyze the current prices with respect to FY 2022, 2023.
If we compare the current market capitalization with expected GDP numbers of FY 2022 and 2023, the market cap to GDP percentage comes around 70-75%.
So if we do not consider FY2021 in our calculation, then we can conclude that markets are fairly valued.
Whether the equity markets in India will fall or move upward depends on foreign institutional investors' participation.
Only FIIs can influence the equity markets by investing more or taking out funds.
FII will be attracted towards the next best alternative class ie. Debt markets only when the yield in debt markets become attractive.
Currently, the US govt security 10-year yield is around 1.05%.
When this yield will rise further, FII would be more interested in investing their money in debt markets.
The first course of action for them would be to take funds out of the emerging markets and invest them in debt markets.
So the equity markets will rally until the debt markets look attractive to the institutional investors.
Once the debt yield is higher, money invested in emerging markets like India would be taken out, leading to corrections in the equity markets.