India’s market cap-to-GDP ratio is at an all-time high, second only to the US. Should you be worried?

Amid the ongoing rally in the domestic equity market, the country’s market cap has reached 120 per cent of GDP, compared with the 10-year average of around 87 per cent. The ratio is used to measure if a market is undervalued or overvalued compared to a historical average. The ratio for other major markets like the US, Japan and China stands at around 155 per cent, 103 per cent, and 81 per cent, respectively. 

The combined market valuation of BSE-listed firms stood at Rs 369.33 lakh crore on January 5, up 31 per cent against Rs 281.95 lakh crore on January 5, 2022. Is the market set to witness some correction, considering the current m-cap to GDP ratio? 

Kranthi Bathini, Director of Equity Strategy, WealthMills Securities, said, “Given the kind of high growth prospects the Indian economy is exhibiting and due the prospects of sustainable growth on longer term coupled with high visibility of corporate earnings, rising m-cap to GDP is not an alarming situation.” 

On the other hand, Abhishek Basumallick, Chief Equity Advisor, Intelsense Capital said, “Market cap to GDP is a metric which needs to be observed over longer timeframes. Indian markets have been doing well and additionally we have seen a number of companies list through IPOs increasing the listed market cap. Overall, it would not hurt the market. This may take out some froth from the markets,” he said. 

According to Nirmal Bang Securities earnings growth has broadly tracked nominal GDP growth, although rising corporate profitability (supported by margin expansion) has led to earnings growth outperforming nominal GDP growth in recent years. “While we expect the rise in corporate profitability to sustain, consensus estimates for earnings growth at over 35 per cent seem extremely optimistic, assuming nominal GDP growth of around 10 per cent,” the brokerage said. 

The brokerage further added that domestically the risk-reward seems more favourable for large-caps compared with small- and mid-caps. However, the key risks are excessive liquidity tightening both globally as well as domestically. Other risks include escalating geopolitical tensions and domestic election risks. 

While sharing key themes and stocks for 2024, Nirmal Bang Securities added that it would remain focussed on domestic plays till the rate cut cycle starts. Themes such as blurring lines between urban and rural and the rise of Tier 2 and Tier 3 cities, financialisation of savings and consumerisation of debt, private capex recovery and the ‘greening’ of manufacturing, rise in global defence spending and India gaining a foothold in global value chains supported by tailwinds such as ‘China +1 are the key themes for the ongoing year. Stocks such as IndusInd Bank, Federal Bank, Shriram Finance, SBI Life, Maruti Suzuki, Ashok Leyland, GSPL, Ambuja Cements, Triveni Turbine and Blue Star are among the top stock ideas for 2024. 

 

 

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