Posts tagged ‘Market capitalization to GDP ratio’

Total market capitalization to GDP ratio

If you have been working daily with macro numbers then probably this would entice you. Total market capitalization to GDP is an indicator of the total listed wealth of a country as a percentage of its GDP. Ratio above 100% which actually values economy more than its GDP is said to depict that the market is overvalued, while a value of around 50%, which is near the historical average for the U.S. market, is said to show undervaluation. More developed a country is more can be its market capitalization to GDP ratio. Since there isn’t any specific level for straight conclusion, one should compare this ratio with peer (in economy terms) countries.

Total market capitalization during 2007-08 (boom period) went to a record high of ~Rs.75000BN whereas at the same time GDP was seen at ~Rs.60000BN which clearly showed that India then was overvalued as aforesaid ratio climbed to a whopping 125% from ~20% in early 2002. Now if one compares this ratio with other emerging economies than we are probably at a higher level. Russia, Brazil and China even today are below 50% whereas India is at ~68%. India has been losing charm from last few years on account of uncertainty and sub standard administration then I don’t understand why India is attracting heavy capital inflows.
One should also note that nominal GDP figure increases ~14-16% Y-o-Y (i.e. Inflation + GDP Growth) hence it is possible for equity markets to deliver similar kind of return (other things remaining constant. i.e. sentiment, liquidity, etc) on the back of maintaining the Market capitalization to GDP ratio.

Market Cap. to GDP

Looking at the graph above one thing seems most likely i.e. Indian equity markets will perform well. This is because India is a developing country, looking at ratio levels of developed country I presume India will come up from current levels (long term horizon) of 68% to 80-90% and supplementing the fact that our nominal GDP will grow at 14-16%. So in al If taken a very long term horizon i..e probably 10Y+ then one can expect annualized returns of more than 16%.

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