Moneycontrol Pro Panorama | Markets not marked to GDP

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Every once in a while when the markets cross a milestone, analysts pull out the Warren Buffett indicator, which is nothing but the market capitalisation of listed stocks to the gross domestic product (GDP) of a country.

The Oracle of Omaha said it was "probably the best single measure of where valuations stand at any given moment”. The rule of thumb for using this measure is that the higher it is, the more overbought are markets.

Now that Indian markets have crossed $3 trillion in market capitalisation, let’s take a look at what it says. Using the International Monetary Fund’s GDP estimates for FY22, we get an Mcap to GDP ratio of 98.3 percent. If you believe this indicator, there is still some room for the markets to rise if they are to touch the year-end peak of 104.9 percent on 31 March, 2008. The intra-year high for Mcap to GDP for India was close to 140 percent at the height of bull run in the mid-late noughties.

Note that the Mcap to GDP varies widely among countries. Many developed nations have a historical ratio of more than 100 percent.

Another way of looking at the indicator is to compare India’s share of world market cap to its share of GDP. As the chart shows, the US’s share of world market cap is way higher than its share of world GDP.

India, on the other hand, is among a handful of countries whose share of world market capitalisation is lower than its share of world GDP. Does this mean that investors are expecting higher growth elsewhere or that the listed universe doesn’t quite capture the extent of India’s vast economic output?

It’s perhaps a bit of both. After all, only a handful of companies account for the lion’s share of India’s market capitalisation. Even if prices were to freeze, the spate of new listings lined up from LIC to Zomato will expand the market capitalisation share.

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Ravi Krishnan

Moneycontrol Pro