Market Cap to GDP is a long-term valuation indicator that has become popular in recent years, thanks to Warren Buffett. Back in 2001 he remarked in a Fortune Magazine interview that "it is probably the best single measure of where valuations stand at any given moment."
Market Cap to GDP Ratio
Definition:
A ratio used to determine whether an overall market is undervalued or overvalued.
Market Cap to GDP = (Market Capitalization of the Country/GDP of the Country)*100
Significance
· The result of this calculation is the percentage of GDP that represents stock market value. Typically, a result of greater than 100% is said to show that the market is overvalued, while a value of around 50%, is said to show undervaluation.
· It’s a logical conclusion that the economic output of a country and the earnings of its companies, and so their valuation, should bear some relationship to the attraction of investing or not investing.
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Ratio = Total Market Cap / GDP |
Valuation |
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Ratio < 50% |
Significantly Undervalued |
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50% < Ratio < 75% |
Modestly Undervalued |
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75% < Ratio < 90% |
Fair Valued |
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90% < Ratio < 115% |
Modestly Overvalued |
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Ratio > 115% |
Significantly Overvalued |
Source: Bloomberg, BSE, CMIE. *based on FY14 GDP data
The debate on whether there is any relevance to the market capitalization to gross domestic product or GDP ratio rages on, however we feel it is an important tool to gauge the overall attractiveness of stock market in any country.
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