Today, India is among the most valued stock markets in the world. India’s total Mcap is ₹450 trillion, the 4th largest in the dollar term, being valued at a Mcap/GDP ratio of 150% based on FY24 nominal GDP (current price) of ₹300 trillion (estimated). The nominal GDP is forecast to grow by 11% in FY25; hence, on a forward basis, the ratio will stand at 138%. Historically, India’s average Mcap to GDP ratio has been 88%. Today we are quoting at 57% premium. Comparatively, developed regions like China and the Euro area have lower market cap to GDP ratios, ranging between 50% and 60%, suggesting that India’s market is relatively expensive.
A similar type of overappraisal valuation is visible in a few other countries, like the US, Taiwan, & Japan. These are valued at 200%, 300%, and 150%, respectively, based on CY24 GDP in USD terms. In that sense, we may be perceived as fair or cheap. However, these states’ economies are varied and not comparable to India’s. The US is the world’s largest and most advanced economy, Taiwan is much smaller—about one-fifth the size of India—and heavily focused on the electronics sector, while Japan is recovering from decades of economic stagnation following the implementation of new reforms like Abenomics.
The US & Taiwan are the countries believed to showcase fast growth & resilience, led by the strength of the economy. Taiwan has benefited significantly from the rise of the new economy, becoming a major supplier of electronics, semiconductors, and tech hardware, especially during periods of slower growth in China. Notably, TSMC, Taiwan’s semiconductor giant, reported a 36% increase in second-quarter profits, reaching $7.6 billion, surpassing expectations. Similar advantages have emerged for other Asian countries like Japan, South Korea, and Singapore, driven by their resilient economies, export-oriented growth, digital economy, and supportive monetary policies, resulting in a favourable market cap to GDP ratio.
Likewise, the US economy managed the COVID-19 crisis effectively, providing financial support to the public through cash dividends. Consumer spending and the job market have been strong. The rise of AI technology has benefit technology sector. Much of the growth in the US stock market has been driven by tech-based companies, which make up a significant portion of US stock market indices, thereby boosting overall market capitalization.
In a nutshell, the valuation of all these countries is high because they were able to generate business when the world economy was transforming into a digital economy. And their domestic economic demand was also able to grow when the rest of the world experienced a slowdown. As these countries have the advantage of being early initiators, they should continue to trade at premium.
However, believing that these high prices or valuations will be sustained is a task. Because these economies have been yielding benefit over the last 3-4yrs led by pent-up demand. If the initial buffer led demand slows, the degree of revenue or earnings growth would normalize, not supporting premium valuation. A slowdown in the world economy, which is feared next year, the US economy is forecast to go-slow from 2.3% in CY24 to 1.8% in CY25, could influence the stock market and peer country valuations. In India, the market has muted earnings forecasts for FY25, starting with the ongoing Q1 results. Nifty50 EPS growth is expected to slow from 23% in FY24 to 10 to 15% in FY25, which will determine the trend going forward.
The author, Vinod Nair, is the head of Research, Geojit Financial Services.
Disclaimer: The views and recommendations provided in this analysis are those of individual analysts or broking companies, not Mint. We strongly advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and individual circumstances may vary.