Will Marketcap to GDP Ratio touch 200% in India?

3 min read
Currently, the consensus is being developed in the market regarding Marketcap to GDP Ration in the Indian Stock Market to touch the mark of 200%. Is it possible and what are the other points to looks upon which are associated with Market Cap to GDP? Know about this in detail, in this short article.

Introduction:

The Market Cap to GDP Ratio which is popularly known as Buffett Indicator is a measure of the total value of all publicly listed stocks in the country’s stock exchange divided by the country’s Gross Domestic Product.

Buffett Indicator- Market Cap to GDP Ratio:

  • The formula for calculating Market Cap to GDP Ratio is:
  • Market Capitalization refers to the total market capitalization of the listed companies in the Stock Market.
  • Whereas, Gross Domestic Product (GDP) is the money value of all goods and services produced in an economy that is produced in an accounting year.
  • In Buffett Indicator, the Market Capitalization is compared with the GDP of the company.
  • If Market Cap to GDP Ratio is above 100%, then as per Warren Buffet, the market is overvalued.
  • If Market Cap to GDP Ratio is less than 100%, then as per Warren Buffet, the market is undervalued.
  • And If Market Cap to GDP Ratio is equivalent to 100%, then as per Warren Buffet, the market is fairly valued.
  • This Market Cap to GDP Ratio which is advocated by Warren Buffet was according to the US Market.

Current Market Cap to GDP Ratio of the USA and other foreign economies:

  • The Current Market Cap to GDP Ratio of the USA has crossed the mark of 200%, which represents the overvalued situation prevailing in the market as per Warren Buffet.
  • The Current Market Cap to GDP Ratio of Taiwan has crossed the mark of 300%, which represents the overvalued situation prevailing in the market as per Warren Buffet.
  • While Comparing India’s Market Cap to GDP Ratio with the USA and Taiwan economy, then India seems to be trading at a much fair valuation then.
  • This has also resulted in the development of predictions of the Indian Market Cap to GDP Ratio to reach 200% by several market participants.
  • In 2007-08 Euphoric Market, the Market Cap to GDP Ratio of India reached the level at around 160% where the euphoric market situation took place based on profitability performance of the companies.
  • But the current market situation is driven by expectation, and if the results of the companies meet the expectation, then this ratio may cross the previous higher levels and might cross the mark of 200%.

Alternative Reason behind the rise in Market Cap to GDP Ratio of India:

  • The Listing of New-Age Technology business has also added flavor to the rising Market Cap to GDP Ratio.
  • As of now, these businesses are not having profitability, but valuations are pretty good.
  • There are many Unicorns and start-up businesses in line to list in the stock market. Few names from them are Zomato, Paytm, MobiKwik, etc.
  • Along with this, one should not forget that the Life Insurance Corporation (LIC) may also list soon and most probably in FY22 with a market capitalization of more than $200 billion at the time of listing.
  • Many companies are unlisted and hence the Market Cap to GDP Ratio may cross the mark of 200% in the case of listing of these companies.

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