Safe Isles in Rough Waves

A crash looks imminent in overvalued markets. Let’s look out for shelters from the raging storm

- VK VIJAYAKUMAR

Globally, we are in a ferocious bull market. The excessive valuations in the markets and the possibility of a major crash have become talking points. Many market gurus have sounded warnings about the froth in the market. Highly respected voices like Ray Dalio, Michel Burry, Jeremy Grantham, and Stanley Druckenmiller have warned that the frothy valuations are unsustainable and, therefore, a crash is on the cards.

The Reserve Bank of India too, in its 202021 Annual Report, warned about a stock market bubble.

There is a near consensus that valuations are excessive. The famous Buffett Indicator Market Cap to GDP (Gross Domestic Product) at 205 per cent is way ahead of the historical average. The PE (Price-to-Earnings) ratio for S&P 500 at 46 is excessive compared to the average of 16. So, the mother market of the US is ripe for a correction, but no one knows when the crash will come. And, when the mother market tanks, all markets – developed and developing – are hit, of course, the degree of impact differs depending on the macros.

Back home in India, all matrixes of valuation point to excesses. In India, the long-term market cap to GDP ratio is around 77 per cent, the long-term PE multiple is around 16, and the median Price to Book value is 3.23. Where are these valuation parameters now? The Market Cap to GDP is 115 per cent, one-year forward PE is around 22, and Price to Book is around 4.44. All three indicators are flashing red.