What Is Market Cap To GDP Ratio?

The monetary worth, in local currency, of all final economic goods and services produced in a country during a certain period is known as the Gross Domestic Product (GDP).

What is an appropriate market capitalization to GDP ratio?

The stock market capitalization-to-GDP ratio is a metric for determining if a market is overpriced or undervalued in comparison to its historical average.
The market can be regarded to be mildly undervalued if the valuation ratio falls between 50% and 75%. Also, if the ratio falls between 75 and 90 percent, the market may be fairly valued, and mildly overvalued if it falls between 90 and 115 percent.
The Buffett Indicator is named after investor Warren Buffett, who popularized the usage of the stock market capitalization-to-GDP ratio.

Meaning

The Buffett Indicator is a valuation statistic that determines if a country’s stock market is overpriced or undervalued in relation to its historical average.
In recent years, the ratio has been known as the Buffett Indicator, after investor Warren Buffett championed its use.
The Market Cap to GDP Ratio, according to Warren Buffett, is one of the finest indicators of market valuations at any particular time.
According to Buffett’s explanation, the ratio is a straightforward means of comparing the value of all listed equities on an aggregate level to the country’s total output (which is its gross domestic product).

Formula

(Value of All Listed Stocks in a Country / GDP of the Country) * 100 = Market Cap to GDP Ratio
As a result, it is a measure of the entire value of all publicly listed stock in a country divided by the GDP of that country (GDP).

Interpretation

In other words, if the Buffett Indicator is excessively high, it indicates that the companies are not producing enough to justify their stock market valuations. As a result, a price adjustment to the downside is unavoidable.
The Buffett indicator is similar to a country-wide Price-to-Sales ratio.
It’s extremely similar to a price-to-sales ratio, which is a very high-level valuation method.
The Price/Sales or EV/Sales metric (Enterprise Value/Sales) is used as a measure of valuation in valuation.
A Price/Sales ratio of more than 1.0x (or 100 percent) is often regarded as an indication of overvaluation. Companies that trade for less than 0.5x (or 50 percent) are deemed undervalued.
Other criteria, like as profitability, growth, and so on, must be considered in order to accurately analyze a company’s valuation.
This is in line with the Buffett Indicator’s interpretation, which makes sense given that it’s effectively the same ratio for an entire country rather than just one firm.

India’s Market Cap to GDP Ratio

We can observe from the figure below that the Buffett Indicator for India has rarely exceeded 100%. This is because, unlike industrialized economies such as the United States, India’s economy is dominated by the unorganized, unlisted sector.
The Buffett Indicator, on the other hand, is useful in an Indian context. Whenever it has deviated too far from long-term norms, it has signaled a possible correction in market participants’ over-optimism or over-cautiousness.
The ratio is a backward-looking indicator that uses data from the past. Over the previous 20 years, the historical average of India’s Market Cap to GDP ratio has been about 75.
As a result, we can claim that the stock market prognosis in March 2020 (when the ratio is 56) was near the bottom. As a result, the Buffett indication provides investors with an early warning before the markets bottom.
India’s Market Cap to GDP ratio surged to 104, a 20-year high, on March 18, 2021, from 56, the biggest decline in March 2020, according to current equity market projections (Lowest since FY2009-10).
The Indian stock market has experienced significant corrections as a result of heavy selling by foreign institutional investors (FIIs) in the wake of the Coronavirus epidemic. In Q1 FY21 and Q2 FY21, India’s GDP contracted the most, by 23.9 percent and 7.3 percent, respectively, resulting in a lower TTM GDP base.
The Indian Stock Market, on the other hand, is currently soaring to new all-time highs on the back of market optimism over a big boost from Budget 2021, Indian Inc. reporting bumper profits in the December quarter (9-quarter high), strong FII comeback since Oct-20, and positive developments on the COVID-19 vaccination drive.
When we compare this to the historical average market cap to GDP ratio of 75, we can see that we’ve come a long way. As a result, we may conclude that the present market outlook (market cap to GDP ratio of 104) is significantly overvalued when compared to the historical norm.

What was the month-to-month change in market valuation for FY2019-20? The monthly movement of India’s Market Cap to GDP Ratio is depicted in the graph below.

India’s Market Cap to GDP Ratio has historically been approximately 74. Corporate Tax Rate Cuts (20th September 2019) and the removal of the FPI Surcharge were two significant measures taken by the government to enhance corporate confidence in India.
Following the news on September 20th that the corporation tax rate would be reduced from 30% to 22%, FPI investments began to revive. Due to the predicted growth in profitability of Indian corporations, the market has developed a favorable feeling. FPIs have been purchasing in the Indian stock segment as a result of the rollback of the super-rich tax and the government’s PSU divestment program.
As a result, India’s Market Cap to GDP ratio increased steadily from 69 in September 2019 to 80 in January 2020. (As shown in the above chart).
However, following the Coronavirus outbreaks in China, Italy, South Korea, and the United States, foreign investors’ general sentiments were negatively impacted due to a number of concerns in the global economic outlook. Since a few weeks, FIIs have been selling heavily in the Indian equity market (February-20 & March-20).
India’s Market Cap to GDP ratio had dramatically corrected at roughly 56 in March 2020, according to equity market projection. It is mostly owing to recent stock market corrections in the wake of the Coronavirus outbreak and its influence on the domestic and global economic outlook.

Equity Market Outlook as on March 18, 2021

India’s Market Cap to GDP ratio increased to 104 from 56 in March 2020, according to current equity market forecasts as of March 18, 2021.
So, based on the accompanying monthly trend graph, present equity valuations are significantly higher than the historical average of 74. As a result, we may argue that the market is currently trading at exuberant levels, based on tremendous anticipation for future growth prospects.
The Indian stock market is currently at all-time highs, owing to market confidence about a major boost from Budget 2021, Indian Inc’s bumper profits in the December quarter (9-quarter high), FIIs’ strong comeback in the last 5 months, and favorable developments on the COVID-19 immunization program.
After bottoming out at 25,981 on March 23, 2020, the BSE Sensex rose by about 102 percent to an all-time high of 52,516 on February 16, 2021, but the market has since dropped by 6.3 percent due to profit booking and a rise in the US G-Sec yield.
The present all-time high index levels reflect a strong market recovery. The bull run on the stock exchanges continues from Dalal Street to Wall Street. Currently, all major global indices are trading at all-time highs.
FIIs have aided the resurgence of the Indian stock market. Union Budget 2021 provided a significant lift, as did higher-than-expected earnings in the December-20 quarter and a stronger-than-expected economic rebound, all of which helped to keep FII momentum and market confidence alive.
On February 16, 2021, both the Sensex and the Nifty are trading at all-time highs. With the rising US G-Sec Yield, the market experienced a minor drop in March-2021. As a result, FIIs began to withdraw funds from emerging markets such as India.
As of March 18th, 2021, the Indian stock market has reached a new high, up 30% from September’s close. FII inflows into Indian equities have been particularly significant. Since October 2020, FIIs have been net buyers, with a net inflow of Rs.1.87 lakh crore.

Limitations of The Buffett Indicator

The market only includes the worth of all of the country’s publicly traded enterprises. The GDP, on the other hand, is the total value of all incomes, which includes unlisted private corporations, small enterprises, MSMEs, sole proprietorships, partnerships, government companies, and government departments, among others. The numerator and denominator are not totally comparable in this regard.
The percentage of enterprises that are listed on a stock exchange (compared to those that are private).
Even if nothing has changed in terms of valuation, the Buffett Indicator would rise if there was a significant increase in the ratio of companies that are public vs. private.
When the market cap reflects a considerably larger part of the country’s economic activity, the buffett indicator is more useful.
That is why the ratio is often employed in advanced/developed countries such as the United States, the United Kingdom, Singapore, Germany, and Sweden, where the formal sector accounts for the majority of business.

Does market capitalization affect GDP?

India’s listed corporations are worth 122 percent of the country’s latest annualised gross domestic product (GDP), the highest level since December 2008, when it was around 150 percent. At the end of June, the ratio was 112 percent, and at the end of March, it was 103 percent.

The current market capitalization (m-cap) to GDP ratio in India is over 55% greater than the 15-year median ratio of 79. On Tuesday, the aggregate market capitalization of roughly 3,500 businesses listed and actively traded on the BSE hit a record high of Rs 250 trillion, up 120 percent…

What is Warren Buffett’s investment ratio?

The Buffett Indicator is the ratio of the entire value of the US stock market to GDP. The ratio was named after Warren Buffett, who described it as “the finest single gauge of where valuations are at any given moment.”

The Wilshire 5000 is the most often used index for calculating the total value of the US stock market. Wilshire provides this data directly (links to all data sources are provided below), with monthly data beginning in 1971 and daily measures beginning in 1980. A one-point gain in the Wilshire index translates to a $1 billion increase in US market capitalization. According to Wilshire, the 1:1 ratio has shifted somewhat, and a 1-point increase in the index amounted to a $1.05 billion increase in 2020. To compensate for this minor drift, we adjust the data back to inception (and projected ahead) on a straight-line basis.

Warren Buffett uses what indicators?

The Warren Buffett Indicator is calculated by dividing the US Wilshire 5000 index by the US Gross Domestic Product (GDP). To put it another way, it’s the ratio of the stock market’s value to US GDP divided by the size of the US economy.

It is used to identify whether the stock market is cheap or costly at any given time. It was named after Warren Buffett, the famed investor who described the ratio as “the finest single indication of where valuations stand at any given moment” in 2001. As a value metric for the US stock market, it is widely monitored by the financial media and investors, and it has reached an all-time high in 2021.

We need data for both the US Wilshire 5000 index and the US GDP to compute the Warren Buffett Indicator.

The US Wilshire 5000 index

Warren Buffett uses the Wilshire 5000 index to calculate the entire stock market value of the United States. This index is a market capitalization-weighted index made up of 3,451 publicly listed firms that meet the following requirements:

The Wilshire 5000 index measures the overall value of the US stock market better than other famous stock market indices like the S&P500, Dow Jones, or NASDAQ. The S&P500 index exclusively tracks the 500 largest companies in the United States. The Dow Jones includes only 30 component firms, while the NASDAQ is dominated by technology companies and excludes NYSE-listed companies. The Wilshire 5000, on the other hand, is usually regarded as the best single measure of the broader US equities market and is frequently used as a benchmark for the entire US stock market.

The Wilshire 5000’s market capitalization is expected to be at 47.1 trillion USD in 2021.

The US GDP

The Gross Domestic Product (GDP) of the United States is a measure of the country’s overall output. The Bureau of Economic Analysis of the United States of America measures it every three months. The GDP is a static measure of historical economic activity, which means it does not foresee or evaluate future economic activity or growth. The US GDP will be 22.7 trillion dollars in 2021.

The Warren Buffett Indicator

We may calculate the value of the Warren Buffett Indicator using the value of the US Wilshire 5000 index and the value of the US GDP:

Without any historical context, this statistic is meaningless, so let’s dig deeper.

Is the Nasdaq 100 now overvalued?

So far, the decline has been too moderate to make the NASDAQ 100 a smart buy. It’s still way overvalued because its prices have climbed significantly faster than earnings in recent years, giving investors less and fewer pennies in profit for every dollar they pay.

Is the American stock market overvalued?

According to the most recent S&P 500 monthly data, the market is overvalued by 113 percent to 179 percent, depending on the indication, down from 124 percent to 189 percent last month.

What is the current Nifty 50 PE ratio?

NIFTY 50 is a portfolio of 50 stocks that represent diversity throughout the Indian economy’s many sectors. The Nifty 50 Index is calculated based on the percentage allocation from various sectors and stocks. NSE Indices Limited is in charge of the Nifty 50 index. The current Nifty PE ratio chart, Nifty PB ratio chart, and Nifty Dividend yield ratio charts are displayed along with historical data from 1999 to the present.

The average P/E ratio of the Nifty 50 businesses is used to create the Nifty P/E ratio, which is a short form of the Nifty Price to Earnings Ratio.

According to today’s Nifty PE Ratio Chart, the Nifty PE Ratio is 23.19, the Nifty 50 PB Ratio is 4.51, and the Nifty Dividend Yield Ratio is 1.12.

Because profits are the primary driver of price, if earnings rise, the P/E ratio will fall. If profits do not increase over a longer period of time, either a price or a time-based correction may be necessary until earnings catch up. If the current Nifty 50 PE ratio is 20, the index is worth 20 times its earnings. The overvalued or undervalued levels of the Nifty PE ratio can be seen on the charts. Since 1999 and up to the present, the Nifty PE ratio has been calculated and provided here. The historical PE ratio, PB ratio, and Dividend Yield ratio Charts of the Nifty Sectoral Indices can also be used to examine undervaluation and overvaluation of different sectors at any point in time.

How Nifty PE Ratio is important ?

According to historical data, the Nifty PE ratio was overbought in February 2000, January 2008, and August 2018. While the Nifty PE ratio fell below 12 in January 1999, May 2003, and October 2008, all of which were oversold periods. Though no one can accurately predict the market’s peak or bottom, a comparison of the current price, EPS (earnings per share), PE ratio, PB ratio, and dividend yield ratio statistics with historical data might aid in the research process. Those that enter the stock market at lower PE levels and invest in the correct instruments might expect a good return over time. You may study the crashes of 2000, 2008, and 2020 using Nifty PE ratio historical data charts, and you can also track several bull markets using the 20+ year valuation charts.

Wise investors start recording profits when the market is overpriced, whereas smart investors begin the accumulation process when the market is undervalued.

Though no one can predict the market, the PE ratio, P/B ratio, and Dividend yield charts of the Nifty 50 and Nifty sectoral Indices may be extremely useful in determining if a stock is overvalued or undervalued, and astute investors can take use of this information.

What are Nifty P/B ratio charts and Dividend Yield ratio charts and how they affect Indian stock market’s Sentiment?

The Nifty P/B ratio stands for Nifty Price to Book Ratio in abbreviated form. According to historical charts, the Nifty P/B ratio is oversold between 2 and 2.5, while it is overbought beyond 4.5.

Nifty P/B ratio climbed above 5 level in February 2000, while Nifty P/B climbed above 6 level in January 2008, indicating overbought zones. If we look at past Nifty PB Ratio charts, we can see that the lower the PB ratio figure, the better the investment chances for investors. As a result, 20+ year PB ratio charts can aid in the analysis of overpriced and oversold levels, allowing investors to study the data and use it to aid in their financial journey.

When the Nifty Dividend Yield ratio was above 3 in 2003, it provided the best investing opportunity. According to historical statistics, anytime the Nifty dividend yield is greater than 1.75 (the higher the figure, the better the investment opportunity), it provides an excellent long-term investment opportunity.

Thus, by examining all Nifty PE ratio, PB ratio, and Dividend Yield ratio charts on this website, one may understand market moods and distinct Nifty Indices opportunities.

The information on the page has been verified and obtained from the National Stock Exchange. In their investment journey, sincere and passionate Indian stock market investors always search deep into the data. The graphs on this site can assist people in their investment path.

Though no one can predict the market, one can gain a sense of market sentiments and related valuations of the various Nifty Indices by analyzing the charts provided on this website. Before investing his or her hard-earned money, one might use historical charts to locate viable possibilities in the Indian stock market. Analyze the value charts of various industries and apply them to your investment strategy.

Is the Indian stock market overpriced?

Even using the Shiller measure, which is the cyclically-adjusted price-to-earnings (CAPE) ratio, valuations are high. It is named after Nobel Laureate Robert Shiller, an economist. This is computed by dividing the broad stock market index’s price by the index’s average inflation-adjusted earnings over a five-year period. Stocks with a high CAPE ratio are costly. According to statistics given by ICICI Securities Ltd, Indian stocks are overvalued by 33.2 times on this metric.

According to Bloomberg statistics, the MSCI India index is trading at a one-year forward PE of roughly 22 times, a significant premium to the MSCI Asia ex-Japan index’s 12 times PE multiple.

In 2021, what would India’s GDP be?

In its second advance estimates of national accounts released on Monday, the National Statistical Office (NSO) forecasted the country’s growth for 2021-22 at 8.9%, slightly lower than the 9.2% estimated in its first advance estimates released in January.

Furthermore, the National Statistics Office (NSO) reduced its estimates of GDP contraction for the coronavirus pandemic-affected last fiscal year (2020-21) to 6.6 percent. The previous projection was for a 7.3% decrease.

In April-June 2020, the Indian economy contracted 23.8 percent, and in July-September 2020, it contracted 6.6 percent.

“While an adverse base was expected to flatten growth in Q3 FY2022, the NSO’s initial estimates are far below our expectations (6.2 percent for GDP), with a marginal increase in manufacturing and a contraction in construction that is surprising given the heavy rains in the southern states,” said Aditi Nayar, Chief Economist at ICRA.

“GDP at constant (2011-12) prices is estimated at Rs 38.22 trillion in Q3 of 2021-22, up from Rs 36.26 trillion in Q3 of 2020-21, indicating an increase of 5.4 percent,” according to an official release.

According to the announcement, real GDP (GDP) or Gross Domestic Product (GDP) at constant (2011-12) prices is expected to reach Rs 147.72 trillion in 2021-22, up from Rs 135.58 trillion in the first updated estimate announced on January 31, 2022.

GDP growth is expected to be 8.9% in 2021-22, compared to a decline of 6.6 percent in 2020-21.

In terms of value, GDP in October-December 2021-22 was Rs 38,22,159 crore, up from Rs 36,22,220 crore in the same period of 2020-21.

According to NSO data, the manufacturing sector’s Gross Value Added (GVA) growth remained nearly steady at 0.2 percent in the third quarter of 2021-22, compared to 8.4 percent a year ago.

GVA growth in the farm sector was weak in the third quarter, at 2.6 percent, compared to 4.1 percent a year before.

GVA in the construction sector decreased by 2.8%, compared to 6.6% rise a year ago.

The electricity, gas, water supply, and other utility services segment grew by 3.7 percent in the third quarter of current fiscal year, compared to 1.5 percent growth the previous year.

Similarly, trade, hotel, transportation, communication, and broadcasting services expanded by 6.1 percent, compared to a decline of 10.1 percent a year ago.

In Q3 FY22, financial, real estate, and professional services growth was 4.6 percent, compared to 10.3 percent in Q3 FY21.

During the quarter under examination, public administration, defense, and other services expanded by 16.8%, compared to a decrease of 2.9 percent a year earlier.

Meanwhile, China’s economy grew by 4% between October and December of 2021.

“India’s GDP growth for Q3FY22 was a touch lower than our forecast of 5.7 percent, as the manufacturing sector grew slowly and the construction industry experienced unanticipated de-growth.” We have, however, decisively emerged from the pandemic recession, with all sectors of the economy showing signs of recovery.

“Going ahead, unlock trade will help growth in Q4FY22, as most governments have eliminated pandemic-related limitations, but weak rural demand and geopolitical shock from the Russia-Ukraine conflict may impair global growth and supply chains.” The impending pass-through of higher oil and gas costs could affect domestic demand mood, according to Elara Capital economist Garima Kapoor.

“Strong growth in the services sector and a pick-up in private final consumption expenditure drove India’s real GDP growth to 5.4 percent in Q3.” While agriculture’s growth slowed in Q3, the construction sector’s growth became negative.

“On the plus side, actual expenditure levels in both the private and public sectors are greater than they were before the pandemic.

“Given the encouraging trends in government revenues and spending until January 2022, as well as the upward revision in the nominal GDP growth rate for FY22, the fiscal deficit to GDP ratio for FY22 may come out better than what the (federal) budget projected,” said Rupa Rege Nitsure, group chief economist, L&T Financial Holdings.

“The growth number is pretty disappointing,” Sujan Hajra, chief economist of Mumbai-based Anand Rathi Securities, said, citing weaker rural consumer demand and investments as reasons.

After crude prices soared beyond $100 a barrel, India, which imports virtually all of its oil, might face a wider trade imbalance, a weaker rupee, and greater inflation, with a knock to GDP considered as the main concern.

“We believe the fiscal and monetary policy accommodation will remain, given the geopolitical volatility and crude oil prices,” Hajra added.

According to Nomura, a 10% increase in oil prices would shave 0.2 percentage points off India’s GDP growth while adding 0.3 to 0.4 percentage points to retail inflation.

Widening sanctions against Russia are likely to have a ripple impact on India, according to Sakshi Gupta, senior economist at HDFC Bank.

“We see a 20-30 basis point downside risk to our base predictions,” she said. For the time being, HDFC expects the GDP to rise 8.2% in the coming fiscal year.