Indian Equity Market is in Comfortable or Overvalued Zone

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Indian Equity market has seen a phenomenal uptrend since 24th March 2020 which can be seen as under:

*Source – Ngenmarkets, as on 23/11/20

The above chart shows that Nifty 50 has given a return of 68.97% since 23/3/2020. During the same period, Mid Cap Index has given a return of 69.25% and Small Cap Index has given a return of 82.39%.

After experiencing the above rally, investors are apprehensive about the valuation of equity market and concerned about probability of correction.

In this analysis, we will try to analyse the movement and valuation of Indian Equity market so that investors can take informed decision regarding their portfolios.

Movement of Indian Equity since 1st January 2020:

*Source – Ngenmarkets, as on 23/11/20

The above chart shows that Nifty 50 has given a return of 5.5% since 1/1/2020. During the same period, Mid Cap Index has given a return of 9.59% and Small Cap Index has given a return of 17.38%.

It can be clearly seen that investors have recovered all their losses in Equity due to Covid related volatility of March, 2020. Small Cap & Mid Cap stocks have performed better than large cap stocks during the same period.

Movement of Indian Equity since 31st January 2018:

*Source – Ngenmarkets, as on 23/11/20

The above chart shows that Nifty 50 has given an absolute return of 16.61% since 31/1/2018. During the same period, Mid Cap Index has given a return of -5.34% and Small Cap Index has given a return of -13.54%.

In the past ~30 months, Indian Equity has hardly given any return. Few stocks in Nifty have moved up but broader equity market is still in negative territory. Especially, Mid Cap and Small cap are definitely in losses and they present an opportunity for investment.

Equity Sectors Performance in the last 12 months:

*Source – Ngenmarkets, as on 23/11/20

The above chart shows that in the last 12 months, defensive sectors like Pharma and IT have given good returns but other cyclical sectors like Banking, Utilities etc. are still in negative territory. This clearly shows that the recent rally of last 8 months is not broad based, few sectors have benefited far more.

The performance of cyclical sectors are dependent on the growth of economy. They perform well when economy grows. With opening of lockdown and positive progress on vaccine, cyclical sectors are expected to start performing.

Cyclical sectors have started doing well in the last 3 months and hopefully the trend is expected to continue.

The above 4 charts clearly shows that equity market has definitely gone up in the last 8 months, but Indian equity investor has hardly made any money in last 3 years. Also, the rally has not been broad based. Mid Cap, Small Caps and Cyclical sectors are still down from their previous highs and offer good opportunity for investment.

Lets look at valuation of India Equity Market now.

Market Capitalisation to GDP Ratio:

*Source – Motilal Oswal Research, as on 30/10/20

The above table shows that Market Capitalisation to GDP (also known as Buffett indicator) for India is at 80 (As on 31st October 2020) . The long term average for the ratio is at 75. The current value shows that Indian equity is overvalued by ~7%.

 PB Ratio of Nifty 500:

*Source – Trendlyne, as on 23/11/20

The above chart shows that PB Ratio of NIFTY 500 is presently at 3.41. The long term average of the PB Ratio for India is at 3.1. Based on this information, it can be said that Indian Equity is overvalued by apporox 10%.

PB Ratio is a good valuation ratio and has become more relevant these days because corporate earnings have seen a huge short term correction due to Covid and has thus made PE Ratio irrelevant for time being.

Indian 10 Year G Sec Movement:

The above chart shows that Indian 10 Year G Sec which is an indicator of long term interest rate in India, has fallen from 8.2% in Sep 2018 to current rate of 5.9%.

The fall in interest rate of ~2.3% in the last 2 years has made Fixed Income/ Debt investment less attractive.

Global Supply of Bonds with Negative Yield:

Globally, the total market value of negative yielding bonds, rose to $17.05 trillion in November 2020, the highest level ever recorded. Approx 26% of the world’s investment grade debt is now yielding sub-zero interest rate.

Because of reduced interest rate on bonds, debt has become less attractive and investors are globally moving their money to equity and other alternate assets. This has led to surge in FII equity investment in India which can be seen from following chart:

*Source – Moneycontrol, as on 22/11/20

The above chart shows that Foreign Institutional Investors (FII) have been investing in Indian Market almost every month and Indian Equity Mutual Funds have been selling every month. Since 1st April 2020, FIIs have made a total investment of ~Rs. 1,42,212 Crores and Indian Equity Mutual Funds have sold ~Rs. 54,528 Crores.


Indian Equity market has given phenomenal return since 23rd March 2020. However, most of this movement has happened as a recovery of Covid market correction. On a three year basis, Indian Equity market has hardly given any return, Mid cap and Small cap  Indexes are still trading below their level of 31st January, 2018.

Valuation indicators like Market Cap to GDP Ratio and PB Ratio indicate that current valuation is ~10% above their long term average. However, its important that we consider this in respect to attractiveness of other asset classes. Interest rate in India has fallen by approx. 2.3% in last 2 years and has made fixed income less attractive.

Globally, ~26% of investment grade bonds are trading below zero interest rate which is leading to inflow into equity markets.

According to us, Indian Equity market is in fair value & comfortable zone now considering the low interest rates in India and globally. Hence, investors should stick to their Asset Allocation policy and stay invested accordingly.

Happy Investing!!


Also Read on FinMedium:  Happiest Minds IPO Details! Everything you need to know!

Dr. Mukesh Jindal CFA, CFP, CAIA, Ph.D.

Alpha Research

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