Saturday, May 16, 2015

Total Market Cap to GDP: Does the 1x hold for India too?

Total market cap to GDP at the end of April 2015 stood at around 84%. Still below the buffet statement of 1 times total market cap to GDP. At the end of Feb 2015 it went up to 89%.

A graph of the Market cap to GDP is here:

The question I am trying answer is whether the 1 times total market cap to GDP holds true in the case of India. The private to public paid up capital ratio is 36:64. This very surprising to me because I thought the majority would not be listed in India. Also paid up capital does not include retained earnings and this factor could very well be off the mark but its a start.

Uncannily, a forbes article (4 Things You Don't Know About Private Companies) says that private firms in the US account for 36% to 59% of the sales in the US. So the numbers for India and the US may be similar as the ratio we saw for private to public did not include partnership firms.

The number of private firms is of course 90% of the total number of firms as most small firms that have not achieved some kind of scale will be private. This holds true for the US as well as India. 

So essentially the total market cap to GDP is basically the market cap of the public firms to GDP. Directionally that would mean that if you included private companies as well that ratio would be around 1.5 times. It also means that if the private to public company paid up capital ratio changes significantly (say it becomes 1:9) then this metric may have to be adjusted.

Another very interesting fact I have found is that the 75th percentile is around 100% which means that approximately 25% of the time the Indian markets have been over the 1x mark. That probably also signals the ability of the market participants to be comfortable with bubble valuations for an extended period of time.