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$5 trillion market cap likely earlier than $5 trillion GDP mark - here is why

Long-term investors need not bother about short-term gyrations in the market. They can remain invested and continue to invest while the market cap races to $5 trillion and beyond in the medium to long-term.

May 29, 2021 / 11:18 AM IST

Indeed, a $3-trillion market cap is a significant milestone in the history of the Indian economy and capital market. India took 70 years since independence to reach the market cap of $1 trillion, in May 2007. The market cap doubled to $2 trillion in 10 years in 2017 and has now reached the $3 trillion mark in 2021.

When will we reach the coveted $5 trillion mark?

Stock market predictions are extremely difficult and can go wrong by a wide margin in the short run. Therefore, without attempting predictions, let me project some trends and probable scenarios.

On all the three occasions when India's market cap crossed $1 trillion, $2 trillion and $3 trillion, the market cap to GDP ratio crossed 1. Many market experts believe that if this crucial ratio crosses 1, the markets are vulnerable to corrections since it denotes overvaluation. It is true that in 2007 and 2017 when this ratio crossed 1, markets corrected.

This can happen again since the other parameters of valuation like PE ratio and Price to Book also are flashing red. There are two triggers on the horizon that can cause this correction: One, a spike in US inflation leading to a spike in bond yields triggering a sell-off in stock markets globally. Two, the second wave and perhaps, God forbid, a third wave of the pandemic inflicting worse than expected damage on the economy.

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This pessimistic scenario may not play out. If India succeeds in bending the COVID curve, paving the way for progressive reopening of the economy and US inflation proves to be transient; the market is likely to remain resilient.

Long-term investors need not bother about short-term gyrations in the market. They can remain invested and continue to invest while the market cap races to $5 trillion and beyond in the medium to long-term. PM Modi had shared his dream of the Indian economy reaching the $5 trillion mark by 2024. The pandemic has pushed this target by a few years. India will reach the pre-pandemic GDP level only by March 2022. Therefore, $5 trillion GDP can be achieved, in an optimistic scenario, only by 2028-29.

But, a market cap of $5 trillion is likely to be reached earlier than that. Why?

India's corporate profit to GDP is now around 2 percent, sharply down from the average of 5.6 percent. In the imminent economic expansion cycle, this ratio is likely to normalize, leading to a disproportionate growth in earnings. It is important to understand that a big part of corporate earnings – from IT, commodities and pharma – are linked to the performance of the global economy, which is rebounding sharply. In the race between GDP and market cap, the latter is likely to overtake the former, albeit with sharp gyrations.

As the market gap races to $5 trillion and beyond, investors should focus on the profit pool of India Inc. 80 percent of India Inc's profit now comes from the top 20 companies, up from 14 percent in 1991. Focus on this Top 20. Some PSUs in this Top 20 are likely to move out as we race to a market cap of $5 trillion. Some firms in the 20 to 50 category in Nifty will move to the Top 20. The challenge is to identify these potential newcomers. Some leading names in paints, adhesives, private sector banking, fintech, telecom and consumer goods are potential candidates. But, dark horses and multi-baggers are likely to emerge from the mid-small-cap space. Investors will be better off playing this space through SIPs in mutual funds.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.



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VK Vijayakumar is the Chief Investment Strategist at Geojit Financial Services.
first published: May 29, 2021 11:18 am
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