India’s $ 3 trillion market cap makes it a compelling global allocation
Stock markets are as much a function of society as of citizens, as much an expression of the collective as of the individual, as much a signature of earnings as of speculation, and as much a paradox as an indicator. So, when you look at the market capitalization – the combined market value of all listed companies – on the Bombay Stock Exchange (BSE) first crossing the US $ 3 trillion mark on May 24, 2021, look at all of these together. by evaluating the event. .
ESB CEO Ashish Chauhan Captures Statistics: 69 million registered investors, 1,400 brokers, 69,000 mutual fund distributors and 4,700 companies have come together to converge around INR 219 lakh crore number, he wrote. As a reminder, India’s GDP (gross domestic product, defined as “the sum of the gross value added of all resident producers in the economy plus taxes on products and less subsidies not included in the value of products. ‘) Is estimated at INR 196. lakh crore. The market capitalization / GDP ratio therefore stands at 112%.
Growing steadily over the past 15 years except 2010, India’s market cap to GDP ratio has fluctuated around 70%. During this period, both the economy and the markets grew steadily at their own pace. At 112 percent today, that ratio is the highest on record. Compared to the global average of 129%, this number is lower than that of the United States (222%), Canada (180%), South Korea (136%), Japan (133%) and United Kingdom (131%). But it is higher than 79% of China.
Growing steadily over the past 15 years except 2010, India’s market cap to GDP ratio has fluctuated around 70%. During this period, both the economy and the markets grew steadily at their own pace.
Of course, all of these markets have hit their highs over the past year. At 85%, India’s 12-month absolute returns (unadjusted for currency) are the highest in the world, followed by South Korea (81%), Canada (63%), United (51%) and UK (48%) and Germany (46 percent). But you don’t assess or analyze a market on the basis of such short-term movements. Over the past two decades, the market capitalization of Indian markets has increased to a compound annual growth rate of 18.2%.
This growth can be seen in several ways. First, the denominator – GDP growth. From the International Monetary Fund (IMF) to the World Bank, other multilateral institutions and large private brokerage firms, India is one of the fastest growing (if not the fastest growing) economies in the world. ). The IMF’s April 2021 World Economic Outlook projects India to grow 12.5% in 2021 and 6.9% in 2022, the highest among major economies. The Asian Development Bank’s April 2021 Outlook forecasts India’s growth rates at 11.0% in 2021 and 7.0% in 2022, again the highest among major economies. If the underlying growth is high, the markets will follow. At present, the rise of the markets is greater than that of the economy; as a result, the market capitalization to GDP ratio crossed 100.
Second, point to point returns. Over the past 30 years, the Sensex has grown from less than 1,000 to over 50,000, a CAGR of 14.9%. The number is 13.4% over the past 20 years, 11.9% over the past 10 years and 14.6% over the past five years. These returns are among the highest of any market with a current capitalization of over US $ 2 trillion. For the past 30, 20, 10, and five years, the returns in US markets, for example, are 8.6%, 6.1%, 11.2%, and 14.6%. Those of Hong Kong are 7.0%, 4.8%, 4.0% and 11.7%. Excess liquidity drives up the value of stocks globally. In India, it is accentuated by domestic investors who invest in equity mutual funds.
The third, the rise in stock prices and market capitalizations is accompanied by a proportional increase in valuations, leading some analysts to say that the Indian market, like many others, is overvalued. At 31 times, India’s multiple of price to earnings is among the highest. A point vertex is not the problem; a sustained high PE multiple could be. But today’s high PE multiple may take into account the history of economic growth and the growth expectations that will continue into the future. As a result, the country, and through it, the underlying businesses that grow faster than the economy, gets a premium. This could of course change overnight.
And Fourth, a large consumer base and large-scale industrial and service activity combined with growing entrepreneurial zeal is working wonders. Is Indian affairs at this point of take-off? We cannot be sure – with an economy of US $ 2.7 trillion, the fifth largest in the world after the United States, China, Japan and Germany, India is expected to be the third largest economy in the world. world during this decade. This GDP will overlap with businesses. China-made COVID-19 virus notwithstanding, global and Indian investors are seeing this story unfold.
The US $ 3 trillion market capitalization of Indian companies shows the extent of its institutionalization with a greater number of direct investors and through intermediaries such as mutual funds, insurance and even provident funds there. enter. The paradox, if at all, is not the brute force of those investments that pushed up valuations, but the strengthening of the underlying companies that will catch up with valuations. Mean reversion, a theory that markets can fluctuate in the short term but revert to a long term long term average, is sure to occur over the next decade. But this comeback, again in the long run, will happen more because corporate profits will rise rather than their market values fall.
The US $ 3 trillion market capitalization of Indian companies shows the extent of its institutionalization with a greater number of direct investors and through intermediaries such as mutual funds, insurance and even provident funds there. enter
Markets are cranky creatures in the short run, but consistent deliverers in the long run. And despite a great story, things could go wrong. At any moment, they can appear overrated. They have repeatedly proven analysts wrong. If you are an Indian investor, you must be invested. But if you’re foreign, remember that with the Sensex at 50,000 India has reached a scale where 10% equity exposure in your portfolios is a necessary growth allocation – not emerging markets, not emerging markets. Asian markets, but Indian markets. Of course, you can wait until it hits 60,000 or 75,000 or more before accepting!