Dailyraven Technologies or the author are not liable for any losses caused as a result of the decision based on this article. Explore the most complete set of 6.6 million time series covering more than 200 economies, 20 industries and 18 macroeconomic sectors. The ratio is now the highest globally after the US and Japan and ahead of other developed economies such as Canada, the United Kingdom (UK), and France.
Under the modified model, the contribution of economic growth and dividend yield stays the same while the valuation reverse to mean changes to -1.72%. Consequently, the stock market of India is expected to return 6.7% a year. In comparison, the combined market capitalisation of all BSE companies jumped from Rs 364.3 trillion at the end of December last year to Rs 453.5 trillion on Tuesday. According to the Bombay Stock Exchange (BSE) data, India’s market capitalization to Gross Domestic Product ratio (mcap-to-GDP) has recorded growth of 15-year high of 140.2%. This increase is significantly higher compared to 95.8% at the end of March 2023.
- Thirdly, the success and applicability of the Market cap to GDP ratio is higher when the market cap reflects a much larger share of economic activity in the country.
- And yes – we must add the caveat that market cap to GDP is a very rough measure of valuation.
- In conclusion, the stock prices of Indian listed companies have risen much faster than the overall growth in the Indian economy, leading to the market capitalization exceeding 140% of the country’s GDP, close to an all-time high level.
- The latest data-driven analysis underscores the strength of domestic fundamentals amidst a volatile global backdrop.
- Leading the pack is the United States, with a market cap nearing USD 55.65 trillion, followed by China (USD 9.4 trillion), Japan (USD 6.42 trillion), and Hong Kong (USD 5.47 trillion).
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The argument made against Market Cap to GDP (MGDP) is that as more companies list every year the market cap increases but the GDP remains on its usual trend. In Saudi Arabia for instance, the listing of Aramco led to a huge boost in the MGDP without any impact on overall market valuation. This was true for India too in the 1990s as India came out of the antiquated Capital Controller of Issues days to the SEBI era of free pricing of IPOs.
- After growing its GDP at above 7-8%, the growth has slowed to just above 6%.
- Over the last few quarters, the use of technology has vastly improved data collection and analysis techniques.
- Our Platform offers the most reliable macroeconomic data and advanced analytical tools.
- Inflation is under control, though core inflation remains sticky, necessitating careful monetary management.
The Modified Predicted Return line indicates the expected, or predicted annualized return for the next eight years if the current TMC / (GDP + Total Assets of Central Bank) ratio reverts to its recent 10 years mean of 89.71%. The Predicted Return line indicates the expected, or predicted annualized return for the next eight years if the current TMC / GDP ratio reverts to its recent 10 years mean of 100.48%. Iii.The total mcap of India’s top 30 listed companies that are part of S&P BSE Sensex increased to 27.2% at the end of March 2023. Warren Buffett has commented on the Market Cap to GDP Ratio, commonly known as the Buffett Indicator, that he believes it is probably the best single measure of where valuations stand at any given moment. The indicator is used to find out if the Stock Market is overvalued, undervalued or fairly valued, when compared to its historical average. Our Platform offers the most reliable macroeconomic data and advanced analytical tools.
In this newsletter, we discuss an indicator of market valuations which is the Market Cap to GDP ratio which is popularly referred to as the Buffett Indicator. In this ratio, we take the total market capitalization of all companies listed in India and divide it by the country’s GDP. “The ratio has certain limitations in telling you what you need to know. Still, it is probably the best single measure of where valuations stand at any given moment.” – Warren Buffett, 2001.
The combined market capitalisation of all BSE companies is up around 24 per cent in the past 12 months compared to 9.5 per cent year-on-year growth in India’s annual GDP at current prices, also called nominal GDP. Despite global economic headwinds, India’s growth remains stable at 6.5%, supported by strong domestic demand. Inflation is under control, though core inflation remains sticky, necessitating careful monetary management.
India’s market cap-to-GDP ratio is at an all-time high, second only to the US. Should you be worried?
The journey began back in May 2007 when BSE-listed stocks hit the trillion mark for the first time. Over the subsequent years, this figure doubled, reaching USD 2 trillion by July 2017, and then hitting USD 3 trillion in May 2021. For example, all listed companies in China currently have a combined market capitalisation of $10.35 trillion against the country’s annual GDP of $18 trillion currently, translating into a ratio of 57.5 per cent.
It is calculated by taking the total market capitalization of all publicly traded stocks, or just the Market Cap of the whole Index in a country, and dividing it by the country’s Gross Domestic Product (GDP). BSE’s total market capitalisation hit $4 trillion mark in November market cap to gdp ratio india 2023 and has soared past $5 trillion in just six months. The BSE listed stocks hit the trillion mark for the first time in May 2007, doubling n over a decade to $2 trillion in July 2017, and then reaching the $3 trillion mark in May 2021.
And yes – we must add the caveat that market cap to GDP is a very rough measure of valuation. The current mcap-to-GDP ratio of 140.2% is just slightly below the all-time high of 149.4% recorded at the end of December 2007. At that time, the total mcap of BSE-listed companies was US$ 850 billion (Rs. 71.7 trillion), while India’s GDP was US$ 574 billion (Rs. 48 trillion) over the previous four quarters.
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The country’s current ratio is slightly below its 10-year average ratio of 58 per cent. The brokerage further added that domestically the risk-reward seems more favourable for large-caps compared with small- and mid-caps. However, the key risks are excessive liquidity tightening both globally as well as domestically. Other risks include escalating geopolitical tensions and domestic election risks. “While we expect the rise in corporate profitability to sustain, consensus estimates for earnings growth at over 35 per cent seem extremely optimistic, assuming nominal GDP growth of around 10 per cent,” the brokerage said. When we are not able to find attractive opportunities to invest in, the balance stays in cash, waiting for the right opportunity to invest within our investment universe of high-quality companies.
Also read: Nifty 50 March Rebound: Here’s What’s Fueling the Market Recovery
A good indicator of the relationship, in terms of a ratio, between the market capitalisation and the GDP is the Buffet method. According to what is called the “buffet indicator”, anything that goes over 100 percent should imply the markets are leaning in the direction of positivity. Examining the timeline of market capitalization on the BSE, we find that the total market capitalization surpassed the USD 4 trillion mark in November 2023, and within a mere six months, it surged past USD 5 trillion.
Inflation has moderated, and policy measures have helped stabilize market liquidity. However, foreign portfolio outflows and currency depreciation remain key risks. In the current scene, only four stock markets globally boast a market capitalization exceeding USD 5 trillion as of 2023. Leading the pack is the United States, with a market cap nearing USD 55.65 trillion, followed by China (USD 9.4 trillion), Japan (USD 6.42 trillion), and Hong Kong (USD 5.47 trillion). Amid the ongoing rally in the domestic equity market, the country’s market cap has reached 120 per cent of GDP, compared with the 10-year average of around 87 per cent. The ratio is used to measure if a market is undervalued or overvalued compared to a historical average.
In conclusion, the stock prices of Indian listed companies have risen much faster than the overall growth in the Indian economy, leading to the market capitalization exceeding 140% of the country’s GDP, close to an all-time high level. The Indian stock markets have been under pressure due to continuous selling by Foreign Institutional Investors (FIIs). One of the key reasons is the strengthening of the US dollar, which makes emerging markets less attractive. Additionally, concerns over a slowdown in corporate earnings growth, global economic uncertainties, high valuations of Indian stocks compared to other emerging markets, and trump tariff risks have further contributed to the market decline. Market Cap to GDP is akin to somewhere between Market Cap to Sales and Market Cap to EBIT (Earnings before Interest and Tax) for a company, both of which can be useful for understanding the valuation of a company over long periods.
The Business Standard report further mentioned that a sharp correction in equity prices followed the record mcap-to-GDP ratio. Over the next 15 months, he ratio declined nearly two-thirds to a low of 54.8% at the end of March 2009. While sharing key themes and stocks for 2024, Nirmal Bang Securities added that it would remain focussed on domestic plays till the rate cut cycle starts.