Indian share markets continued to witness further selling pressure in the afternoon session with financial and energy stocks taking the brunt as fears of a trade war due to the imposition of US tariffs preyed on global markets.

At the closing bell, the BSE Sensex closed lower by 509 points and the NSE Nifty finished lower by 165 points. The S&P BSE Mid Cap finished down by 1.1% while S&P BSE Small Cap finished down by 1%.

We generally refer to PE or price to earnings ratio to gauge whether the market is undervalued or overvalued. If we go by this ratio, the Indian market is clearly in overvaluation territory.

There is still another ratio, which is frequently used to evaluate the valuations. The market capitalization to GDP ratio. It is one of Buffett’s favourite indicators of broader market value. The market cap of all the listed companies in the country divided by the gross domestic product (GDP) of the country gives us this ratio.

Market Cap to GDP Ratio Close to 100%

The idea behind this ratio is simple. Stock prices are derived from expected earnings for corporates and GDP represents revenue of the country. This gives investors an estimate of whether the two are moving in tandem. A ratio above 100% shows overvaluation and one below 50% shows that the market may be undervalued.

Even this ratio is showing valuations reaching its peak levels. India’s market cap to GDP ratio reached 95%. This ratio was more than 100% after the 2007 bull run. Stock prices had seen a significant meltdown after that amid the global financial crisis.

Asian stock markets finished lower today with shares in China leading the region. The Shanghai Composite is down 0.65% while Japan’s Nikkei 225 is off 0.58% and Hong Kong’s Hang Seng is lower by 0.12%. European markets are mixed today. The DAX is up 0.35% while the FTSE 100 gains 0.17%. The CAC 40 is off 0.09%.

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