What is Market Cap to GDP Ratio Buffett Indicator Latest India Number? Yadnya Investment Academy

Market cap does not directly affect the stock price, however, it reflects the company’s perceived value in the eyes of the investors and this can affect the share price in the long term. Market capitalization is used to calculate various ratios a part of fundamental analysis and may affect an investor’s decision to invest or not and ultimately the stock price of the company. In terms of market capitalization, Reliance Industries, which is headed by Mukesh Ambani, is the number one company in India. It is a multinational conglomerate that is headquartered in Mumbai, India. It is a Fortune 500 company and the largest private sector company in India. Its products and services touch almost all Indians on a daily basis and include energy, petrochemicals, natural gas, retail, telecommunications, mass media, and textiles.

It is also impacted by the percentage of companies that are traded publicly. If everything is equal and there was a large rise in the percentage of companies that are public vs private, the market cap to GDP ratio would rise even though nothing has changed from the perspective of valuation. In current Equity market outlook as on March 18, 2021, India’s Market Cap to GDP ratio jumped 104 from 56 in March 2020. So, from the above monthly trend graph, we can say that current equity valuations are considerably well above the historical average of 74. Thus, we can say that currently the market is trading at euphoric valuations, on strong optimism for future growth outlook. Thus, if we compare with the historical average market cap to GDP ratio of 75.

• This argument assumes a near-perfect correlation between economic growth and stock market performance.
• But all this could not prevent 15 years of stagnancy in the country’s benchmark stock index.
• In fact, you’d witness the same situation if you used the market cap to GDP ratio when Aramco was listed in Saudi Arabia.
• Use of technology has vastly improved the data collection and analysis techniques.

We do not sell or rent your contact information to third parties. Even after the recent correction, 115 stocks in the Nifty500 are still in the PE Sell Zone, including Infosys, Adani Enterprises, Asian Paints and Bandhan Bank. What do you think would happen to the overall market’s valuation?

How to interpret the Market Cap / GDP ratio for India currently?

These returns are among the highest in markets that have a current capitalisation of more than US $2 trillion. For the past 30, 20, 10 and five years, the returns from the US markets, for instance, are 8.6 percent, 6.1 percent, 11.2 percent, and 14.6 percent. Those from Hong Kong are 7.0 percent, 4.8 percent, 4.0 percent, and 11.7 percent. A liquidity surplus is pushing stock price values higher globally. In India, it is being accentuated by domestic investors that have been investing in equity mutual funds.

As the RBI raises interest rates and liquidity shrinks, companies will have to battle both costs as well as the rising price of debt. Furthermore, the Buffett Indicator is known as many things – an economic indicator, a valuation technique, and others. This means, the listed companies in India are worth 122 per cent of India’s latest annualised gross domestic product . The combined m-cap of nearly 3,500 companies listed and actively traded on the BSE reached a new high of Rs 250 trillion. All efforts have been made to ensure the information provided here is accurate.

Life Insurance Corporation of India is an Indian statutory insurance and investment corporation, headquartered in Mumbai. It stands as one of the oldest and largest insurance providers serving for more than 65 years in India. If you just look at the share prices, you might think that MRF’s share price is quite large compared to Maruti Suzuki, and hence, it may be bigger.

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However, the total number of outstanding shares of Maruti Suzuki is much large compared to MRF. Maruti Suzuki has around 30.21 Crore shares while MRF has 0.42 Crore shares. A slew of recent negative cues have led to the view that the Indian stock market, which has been shrugging off these concerns, needs to see a meaningful correction and remains an expensive bet compared to peers.

• After growing its GDP at above 7-8%, the growth has slowed to just above 6%.
• Profitability, Growth, Valuation, Liquidity, and many more filters.
• But while the premium is now lower than last year’s peak, the Indian stock market is still pricey, indicating that a further decline could be on the cards .
• From the International Monetary Fund and the World Bank, to other multilateral institutions and large private brokerages, India is among the fastest-growing (if not the fastest-growing), economies of the world.
• We do not sell or rent your contact information to third parties.
• This is even as the 12-year average indicator value for India stands at only 79 level, suggesting the domestic stocks are overvalued.

Over the last few quartehttps://1investing.in/, the use of technology has vastly improved data collection and analysis techniques. That means that the underreporting of revenues to save taxes will gradually reduce, and that will give a more realistic picture of the GDP. Full access to our intuitive epaper – clip, save, share articles from any device; newspaper archives from 2006. BEER ratio is a metric used to evaluate the relationship between bond yields and earnings yield, which is the inverse of the price-earnings (P/E) multiple.

The Market Cap to GDP ratio is nowhere close to what it was in 2007, at the peak of market valuations. Remember, you also need to adjust to the fact that the coverage of the market has expanded substantially. That may not make the current market/GDP ratio fully comparable with the past data. How is the Indian equity market valued on the more conventional parameter of forward price-to-earnings (P-E) multiple? On a one-year forward P-E basis, the premium valuation the Indian market enjoys over its peers has started to fall.

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First off, the method used by the indicator for forecasting is simple. As a result, it does not take into account many other factors that could play a role in the valuation of a market. But then COVID hit in 2020 and a lot of new investors entered the market. Let’s see whether this pushed the Indian market to be fairly valued or overvalued.

According to Motilal Oswal, M-cap/GDP has rebounded to 112 per cent at present , above its long-term average of 79 per cent. Amit has over 15 years of experience in investment analysis and portfolio management. He had set up the research desk at Fintrekk Capital across multiple asset classes. In his previous stints, he has worked as a business consultant and analyst with leading MNCs and start-ups over diverse fields of Healthcare, Education and Retail. So the present argument that the Indian market is “expensive but nowhere closer to bubble territory” based on historical PE ratio and Buffet Indicator trends, may become totally redundant. The market participants might have to evolve new parameters for valuing the market that would be appropriate in the evolving scenario.

While market cap has expanded at a faster pace and the market cap to GDP ratio has risen from about 27 percent of GDP to over 100 percent of GDP over the period, one can’t deny the contribution of economic growth to its expansion. Like Romeo, the stock market may have moved too fast, especially when we compare it to India’s real GDP growth. For the first time, India’s total stock market capitalization is at a record 165% of India’s estimated real GDP for FY22. Lastly, the ratio is impacted by the trends in Initial Public Offerings .

Key takeaways from the market cap / GDP chart of India

The above chart captures the market cap / GDP ratio of the world markets for 42 years from 1975 to 2017. As can be seen from the above chart, the two peaks when the Market Cap / GDP ratio crossed the 100% mark represent the two massive peaks of 1999 and 2007. In 2017, the markets have once neared the 100 mark, and the only two occasions when the Market Cap / GDP ratio crossed 100 resulted in massive wealth destruction. That is something the world markets need to be cautious about. India ranks 6th in terms of market capitalization after overtaking France and ranked after the US, China, Japan, Hong Kong, and the UK. In October 2021, India’s market cap had reached $3.46 trillion, up by 37%, according to an index compiled by Bloomberg.

A standard metric of measuring whether markets overall are underpriced or overpriced is to look at the Market cap to GDP ratio. The first concept to clear is the meaning of GDP, or gross domestic product. It is also a good idea to compare the GDP to the market cap and note how both concepts differ, yet may relate to each other in significant ways, in tune with the economy of any country. Another thing to note is the market cap to GDP ratio in India today. All this will automatically be clarified when the concepts are made more meaningful.

Thirdly, the success and applicability of the market cap gdp ratio india cap to GDP ratio is higher when the market cap reflects a much larger share of economic activity in the country. That is why the Market Cap / GDP ratio is much above 100 in advanced countries like the US, UK and Singapore, where more of business comes under the formal sector. ICICI Bank is an Indian multinational banking and financial services company headquartered in Mumbai and its registered office in Vadodara, Gujarat. It offers a wide range of banking products and financial services in the areas of investment banking, life, non-life insurance, venture capital, and asset management. India’s market capitalization has grown at a CAGR of just under 20 percent since 2002, while India’s nominal GDP has grown at a CAGR of a tad over 12 percent during the same period.

Warren Buffet once said that the buffet indicator is probably the best single measure of where valuation stands at any given moment. One of the reasons he said this because it’s a simple way of viewing the value of all stocks on an aggregate level and then comparing that value to the country’s total output which is the GDP. Taiwan clocked a GDP growth of over 5% between 1990 and 2008. It fell almost 50% from its level of 12,000 on January 1990. Taiwan’s economic growth story is one of great success but its stock market performance is one of the worst in the developing world.

We cannot be sure—a US $2.7 trillion economy, the world’s fifth largest after the US, China, Japan and Germany, India is expected to be the world’s third-largest economy within this decade. The Made in China COVID-19 virus notwithstanding, global and Indian investors are seeing that story play out. What are the most valuable companies in India now after the sharp correction in the markets? If we assume that the ratio will reverse to the historical mean of 76% over the next 8 years, the contribution to expected annual return is 5.79%. The indicator value for India stood at 105 level as of October end, based on FY23 projected nominal GDP levels.

Are Indian markets overvalued?

Similarly, if you had sold out at P/E ratios of above 25 in 2007 and 2010, you would have managed to buy back into the market at lower levels. It only considers the total earnings of listed companies in the market. What about many large companies and businesses that are either government owned or are not listed? Amid fears of a global slowdown, India is among a few major stock markets that delivered positive returns in 2022 so far. Due to this, India’s valuations vis-à-vis emerging markets have jumped to historic high and its market capitalisation (m-cap) as a percentage of the world market cap is also at a record level.

Corporate Tax Rate Cuts (20th Sept-19) was a great boosting measure given by the Government to Indian Corporates to build business confidence and Removal of Surcharge on FPIs. The Buffett indicator is like a Price-to-Sales ratio for the entire country. It relates very closely to a price-to-sales ratio, which is a very high-level form of valuation. Thus, It is a measure of the total value of all publicly traded stock in a country, divided by the country’s Gross Domestic Product . I dont know which article this Moneylife author is trying to blast..

With 60% of equities trading at a premium to their historical averages, it is no surprise that the market cap-to-GDP ratio at 115% is way above the long-term average of 79%. Also known as the Buffett indicator, it is a measure of the total value of all publicly traded stocks divided by a country’s gross domestic product . The only two occasions when the ratio was below the long-term average was in FY09 [55%] and in FY20 [56%]. Despite the pandemic-hit FY21 that disrupted businesses, a good amount of monetary stimulus found its way into stock markets, not just globally, but in India as well. While earnings growth has been robust so far, valuations are not cheap. With inflation concerns and QE taper announcement, the exuberance around India’s growth could cool off.

As of February 2022, the latest argument is that India’s market cap to GDP ratio has touched a multi-year high of 116% based on FY 2022 GDP estimates. Despite some recent corrections in the wake of the Russia-Ukraine crisis, Indian equities remain expensive and markets remain overvalued. India’s m-cap now account of 3.5 per cent of the all listed companies in the world. The country enjoyed a m-cap percentage of 3.3 per cent somewhere in 2010.

India’s Market Cap to GDP Ratio jumped 20-year HighThe ratio is a backward-looking indicator comprising historical data. The historical average of India’s Market Cap to GDP ratio over the last 20 years period is around 75. In short, if the Buffett Indicator is too high, it means that the companies are not producing enough to be worth their valuations on the stock market.

Corporate profit growth had given indications that the capital cycle is showing green-shoots of turning around. That means that the sales numbers across sectors should pull up and that will be a major positive for the GDP number. That will make the market cap / GDP ratio look a lot more benign. Its population of 1.38 billion people has grown four-fold and foreign direct investment has multiplied over 100-fold to $84 billion. That’s just a glimpse of the scale of change the nation has seen in the past 75 years.

As a result, the country, and through it, the underlying companies that are growing faster than the economy, gets a premium. The paradox, if any, is not the brute force of these investments that have taken valuations higher, but the strengthening of the underlying companies that will catch up with the valuations. The mean reversion, a theory that says markets may fluctuate in the short term but revert to a long-run mean in the long term, will definitely come over the next decade. But this revert, again in the long term, will happen more because earnings of companies will grow rather than their market values fall. The Buffett Indicator is a broad measure of stock market valuations.

One of the key drivers of GDP growth is corporate profits, and the IIP numbers do indicate that the capital cycle is showing green-shoots of turning around. That means that the sales numbers across sectors should pull up, which will be a major positive for the GDP number. At 3.2x, the 12-month trailing price-to-book value of Nifty was 10% above its historical average of 2.9x. The 12-month forward PB was at a premium of 7% to the Nifty’s historical average of 2.6x. Agrochemicals has so far also delivered a good quarter, although rising costs have put margins under pressure – this sector has limited capability of passing on costs to farmers, especially in India’s price-sensitive rural market. This was pretty much the case in most markets, including the US which had a Buffett Value of ~194%.

Warren Buffett believes that Market Cap to GDP Ratio is one of the best measure of where valuations of the market stand at any given moment. Besides, in the last 12 months, the global market cap has declined 8.4 per cent while on the contrary India’s market cap has risen 7.4 per cent. Barring Indonesia and India, all key global markets saw a decline in market cap over the last 12 months. It is also likely that many of these companies in future are also included in the benchmark indices like Nifty and Sensex thereby elevating both the Total Market cap and PE ratio of these indices. Of course, this entry will come at the expense of old economy stocks like PSUs and commodity cyclicals.