Indian market sheds more value than other emerging ones

The rout in equity values has seen market capitalisation of the Indian stocks erode by 42 per cent so far this year, making it the worst performing market among key emerging markets.

For foreign investors, the losses would have been much greater as the rupee depreciation has added another four percentage points to 46 per cent when measured in dollar terms.

This is much more than the 34 per cent decline witnessed by the Sensex from January till date.

Clearly, the steeper decline in mid- and small-cap stocks has accentuated the wealth decline.

India’s current market cap is $9,68,526 million (Rs 41,40,360 crore). Vietnam is the only regional market to have fared worse. China’s market follows India with a 42 per cent decline (dollar terms) in market cap. Among the leading Asia Pacific and emerging markets, Australia and Brazil withstood the market correction better, as the basket of commodity stocks fared well amidst the correction in stocks.

Surprisingly, the US market, which flagged off the meltdown with the credit crisis, has witnessed a decline of just 15 per cent in its market cap.

Among developed markets, Japan weathered the correction reasonably well, losing only 9 per cent in market cap terms.

The recent market rout has also resulted in India’s market cap falling below its GDP (in nominal terms), taking its market cap-to-GDP ratio to 0.9. To institutional investors this ratio holds significance from a valuation perspective.

Ratio tab

India’s stock market capitalisation overtook its GDP value for the first time in October 2006 and peaked to as much as 1.8 times in early January 2008, before starting to shrink. South Korea is another prominent Asia Pacific market whose market cap-to-GDP ratio has fallen below 1 recently. As against this, markets such as the US, Japan and Argentina continue to trade at a premium to their respective GDPs.

Does a ratio of less than 1 make the Indian stock market a good “buy” at this point in time?

Investment guru Mr Warren Buffet has been quoted as saying that the market cap-to-GDP ratio could be a good measure of how attractive a market is at any point in time.

A 2002 quote in the Fortune magazine has him saying that “if the percentage relationship (between market cap and GDP) falls to the 70-80 per cent area, buying stocks is likely to work well for you. If the ratio approaches 200 per cent — as it did in 1999 and a part of 2000 — you are playing with fire.”

(Businessline dt.6.6.2008)