India’s market cap to GDP ratio has increased by 91 percent due to the boom in the equity market. This ratio was 56 percent in the last financial year. The increase in market cap to GDP ratio in this financial year was due to the rise in domestic stocks. The boom in domestic stocks has come from the increase in foreign investment. According to brokerage house Motilal Oswal, with this boom, now the market cap and GDP ratio of the domestic market has exceeded its long period average of 75 percent.
This indicator is called Buffet Indicator because veteran investor Warren Buffet has made it so famous. In this indicator, the market capital of all the listed companies is compared with the GDP of the country. Through this, it is assessed whether the stock market is overvalued or undervalued.
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India’s 2.3% stake in world’s M-cap
The market cap to GDP ratio is very volatile. It was 79 percent in FY 2019 and in the next financial year it was 56 percent. Talking about the current financial year, it is currently at around 91 per cent, while the long term average is only 75 per cent. According to Motilal Oswal’s report, India’s share in the world’s M-cap is 2.3 percent, which is partially less than the historical average of 2.4 percent. In the last 12 months, the world’s M-cap has increased by 19.9 percent whereas in India it has increased by only 8 percent. In the last 12 months, Chinese equity has increased by 54 per cent, South Korean stock market by 39 per cent and Taiwan’s M-cap by 29 per cent.
The valuation of Nifty has also increased
The boom in the stock market has also increased the valuation of the Nifty. At 21x, the Nifty is trading at a 12-month forward P / E at an 11 per cent premium over its long-term average. The 2.8x Nifty P / B is currently at a 10 percent premium to its historical average. Apart from this, the Nifty’s P / E for the last 12 months is currently at 26.7x which is at a 34 per cent premium to the long period average of 19.8x. Nifty trailing P / B at 3.1x is also running higher than the historical average of 2.8x.
Source: www.financialexpress.com