What does Market Cap/GDP Ratio tell about Market Valuations?

By Advisorymandi
4-October-2018 8:49:51 AM

Market cap to GDP ratio aka Buffett indicator is a common metric which tells a lot about market valuation, whether the market is overvalued or undervalued. Most investors look for the price-to-earnings ratio (P/E) for market valuations. But, the problem with that metric is, it only tells about the overvaluation and undervaluation at market level. The market only measures the value of listed companies in the country but the gross domestic product (GDP) is the value of all incomes including the private companies, government companies, government departments, small businesses, partnerships, proprietorships, and MSMEs etc. And the market capitalization to GDP ratio is the ratio of stock to flow like the price to sales.


World Market Cap/GDP Ratio

The success of market capitalization to GDP ratio is higher when the market cap reflects a much larger share of economic activity. That explains, why some countries like the US, UK, and Singapore have a ratio much above 100.

If we take a look at the below chart, the market cap / GDP ratio of the world markets from 1975 to 2017 and the world has crossed the 100 percent mark two times – in 1999 and 2007. In 2017, the mat cap / GDP ratio come quite close the 100 percent mark.



Typically, a result that is above 100% is said to show the overvaluation in the market, while a value below 50% is said to show the undervaluation in the market. But, if the value falls between 50 and 75% then the market said to be modestly undervalued and fair valued if it is between 75-90%. But, if it falls within the range of 90 and 115% then the market said to be modestly overvalued.

This ratio affected a lot by the trends in initial public offerings (IPOs) and the percentage of companies that are publically listed. So, if there is a huge increase in publically listed companies in comparison of private, then the market cap to GDP ration would go up.


Market Cap / GDP Ratio in India 2018

Given below is the market cap / GDP ratio of India from 2007 to 2018 where you can see that the ratio crossed the 100 percent mark two times – in 2007 and 2017. But, this year in 2018, the market cap / GDP ratio come down to 88% from 100%. The reason behind this is the huge wealth destruction in mid caps and small caps. But, previous year in 2017, the ratio crossed the 100% mark in almost 10 years. This is a clear sign of overvaluation in the Indian market which is due to the upbringing of more sectors into the capital market.



In 2009 and 2010, the ratio came quite close to 95% back-to-back but it was not even close to what it was in 2007.


Key takeaways:


  • The market cap / GDP moving higher can also be ascribed to the sharp rise in the IPO collections in the last year. During the FY-2017-18, the IPO markets have seen $12.5 billion of the collection that has added to the market valuation.
  • Corporate Profits and IIP numbers are two key drivers of GDP growth which also indicate that the capital cycle is showing green-shoots of turning around. That means only one thing that the sales numbers across sectors should pull up which will be positive for the GDP no.
  • Over the last few quarters, the technology has vastly improved the data collection and analysis techniques which have reduced the underreporting of revenues to save taxes.


In a nutshell, market cap to GDP ratio is definitely a good method of gauging the market for overvaluation and undervaluation. Still, Indian market valued more conventional methods like price-to-earnings ratio (P/E). But, no doubt, the Buffett indicator is quite useful to measure the market valuation and that is something to be cautious about.

Nevertheless, if you have any query or would like to add something up then don’t forget to mention in the comment section below. We will be happy to hear from you!


Note: All information & data provided in this article is for the educational purpose as well as to give general information on the finance & economy, not to provide any professional advice or service. Views & opinions are not biased against the company and do not affect any official policy or any other agency, an organization within the content.

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Author: Advisorymandi

AdvisoryMandi is India's most trusted Stock Market Advisory marketplace covers NSE, BSE, MCX & NCDEX. Invest with confidence and harness the power of AdvisoryMandi to make smarter investment decisions in Stocks, Indices, Commodities, Forex & IPO.

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