Market cap to bank deposits ratio suggests time to buy
Market cap is lower than bank deposits, says Jagannadham Thunuguntla, Strategist & Head of Research, SMC Global Securities Limited
December 22, 2011 / 16:26 IST
Market cap is lower than bank deposits, says Jagannadham Thunuguntla, Strategist & Head of Research, SMC Global Securities Limited
1. Indian capital markets are under severe pressure in the recent past. However, the silver lining is that the valuations in the capital markets are slowly reaching the zone of "undervaluation".2. An effort is made in this report to reflect this through a ratio "Market Cap to Bank Deposits".3. The elements of fear and greed (which drive the capital markets), are clearly visible in the trends of allocation of assets by the investors in terms of cash and stocks. This can be seen in the levels of market cap and the levels of bank deposits in the economy. When there is fear, the bank deposit levels go up. And, when there is optimism, the market cap levels go up.4. In this background, here we have made a small attempt to compare the BSE market cap levels (over the period starting January 2007), with the aggregate bank deposits in the banking system. The relative measure of "the entire market capitalization of BSE as % of aggregate bank deposits in the entire banking system" reflects the level of risk appetite in the investor community.5. For instance, in January 2007, the BSE market cap as % of aggregate bank deposits is at the level of 152%, which means BSE market cap is 1.52 times more than the entire bank deposits.6. As the bull market cap kept racing ahead during 2007, these levels of BSE market cap as % of aggregate bank deposits have kept rising. By the peak of the bull market, that is by December 2007, these levels have reached to the tune of 235%. Meaning thereby, with all the bank deposits available with the schedeuled banks of India put together can't even buy half of the BSE stocks. At that time, the aggregate bank deposits is to the tune of Rs. 30.47 lac crores, whereas the BSE market cap was at Rs. 71.69 lac crores. This probably is the sign of 'excess optimism' in the capital market.7. However, by the time bear market commenced in 2008, this level of BSE market cap as % of aggregate bank deposits has consistently kept falling. By the time the markets have touched the bottom in February 2009, this level has fallen to 74%. Which means that, with the aggregate bank deposits available with the banking system one can buy the entire BSE listed stocks and will still be left with 26% of the deposits. Probably, this is the sign of excess fear in the system. By this time, the total BSE market cap was to the tune of Rs. 28.62 lac crores, whereas the aggregate bank deposits was to the tune of Rs. 38.48 lac crores.8. With the markets started recovering since March 2009, again this level of BSE market cap as % of aggregate bank deposits has crossed 100% levels and these levels have reached at about 151% by September 2010.9. As bear markets have again set in the calendar year 2011, this ratio has again fallen below 100%. Currently, this ratio is at 94%. This is the first time that this ratio has fallen below 100% after April 2009. Meaning thereby, currently, the entire market cap of the country is lower than the aggregate bank deposits. This clearly reflects that the valuations are reducing and slowly reaching attractive levels. This also reflects that the present mood of the capital markets is occupied with "fear". However, the current levels are still some distance away from the 2008 bear market lows of 74%.Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.To read the full report click on the attachment 
Read More
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
