Last week, the Sensex breached the 30,000-mark and the Nifty moved above 9,000 before retreating a bit. So, is the Indian market overheated? Not if you look at the market cap-to-GDP ratio, Warren Buffett’s favourite long-term valuation indicator.

The market cap-to-GDP ratio for India is at 0.83 now. Though this is up from 0.65 last year, a ratio below 1 implies that there is no cause for alarm.

Going by historical numbers, the last time the ratio crossed 1 was in 2007-08, just ahead of the global crisis.

However, the current market cap-to-GDP ratio isn’t very far away from that threshold. So, should investors worry?

Says Gopal Agarwal, CIO, Mirae Asset Global Investments: “If the market-cap to GDP is under 1, the market is undervalued, but at around 0.83 now I would say our markets are in a zone of reasonable valuation, so, a 17 per cent upside is possible.”

“There is still room for investors to make money. The macros are good. A rate cut has happened, inflation has moderated, the rupee is stable and the Centre has taken growth initiatives in the Budget, which will fructify over a period of time,” he added.

The increase in the ratio has happened due to the rally in the market cap, says Saurabh Mukherjea, CEO, Institutional Equities, Ambit Capital. “Usually, when the market heats up, the market cap-to-GDP ratio moves higher and once we are into a bull market for three-four years, like we were in 2007-08, the ratio gets to 1.3 or 1.4 or so.”

“This time, we started the bull market a year and half ago and I think it can quite comfortably go to 1.4 or 1.5 and the current 0.83 is not particularly high,” he added.

Market rally

Of the BRICs pack, China has witnessed the sharpest rally in stock markets over the past year. The country’s market cap has moved up 61 per cent to $5.4 trillion in this period as investors once again bet on the country’s growth prospects.

But despite this rally, China is still less expensive than India. The country’s market cap-to-GDP ratio is currently at 0.53.

Explaining this, Agarwal says, “China’s GDP is over $9 trillion but its stock market is relatively small with mostly industrial companies and not many MNCs. With industrial companies not doing well worldwide, China’s valuation is low.”

On the other hand, India’s market cap has recorded a 36 per cent rally to reach the current level of $1.69 trillion.

Other BRIC countries, however, did not fare as well. Brazil’s market cap has fallen 22 per cent (to $0.68 trillion) and Russia’s market cap has plunged 29 per cent (to $0.4 trillion) over the past year mainly due to the fall in the prices of commodity-oriented stocks. That probably explains why the ratio is below 0.5 for both these countries.

More expensive

On the market cap-to-GDP parameter, there are global markets that are more expensive than India. Thailand, from the emerging markets pack, has a market cap-to-GDP ratio of 1.18. The Philippines’ ratio is at 0.97.

From the developed markets, the US is at 1.42 (up from 1.33 last year), while Japan’s market cap-to-GDP ratio is at about 1.01. Singapore, too, boasts of a ratio well above 1.

These calculations are based on India’s recently released new GDP data.

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