Stock market capitalization vs. GDP for India
The Indian GDP officially crossed the trillion dollar mark a few weeks ago - - and now it is the stock market’s turn to do so: M-cap inches close to $1 trn.
The journey towards the $1-trillion mark is nothing less than spectacular, considering that the market cap was just about $150 billion in 2004. To put in context, the total bank deposits in 2004 was $500 billion and has crawled to about $650-700 billion in the same period.
By including the capitalisation of Indian entities listed on London’s Alternative Investment Market, the global firms acquired by the listed Indian companies in the last two months and others that are often considered a part of the Indian universe, we reach a total of $992 billion.
Thus, the market cap to GDP ratio for India is near 1 (i.e. 100%). But notice how it compares to the historical average, and note that it was only ~55% in 2004:
Source: Worldbank
Raw data can be found at the Reserve Bank of India site: GDP, BSE Market cap, NSE Market cap.
This leads us to two questions:
- How does this compare to other countries?
- Does the ratio matter?
To the second question, atleast one person thinks it might be important:
Warren Buffet in January 2002: If the Mcap-GDP ratio falls to the 70% or 80% area, buying stocks is likely to work very well for you. If the ratio approaches 200%–as it did in 1999 and a part of 2000–you are playing with fire. As you can see, the ratio was recently 133%.
Even a highly developed economy/market such as the US has not seen the ratio above 100% for too long. The above chart goes only until 2000; the ratio currently stands at ~145%.
Bottom-line: While the MCAP/GDP ratio might serve as a useful ‘level indicator’, the catch is in the timing - the ratio could go to 150% or 200% before reverting to some mean - and any bearish position solely based on the ratio would get slaughtered!
