Mutual Fund Ratios – Market Cap to GDP Ratio

by Mirae Asset Knowledge Academy

Market Cap to GDP is a long-term valuation indicator that has become popular in recent years,
thanks to Warren Buffett. Back in 2001 he remarked in a Fortune Magazine interview that "it is
probably the best single measure of where valuations stand at any given moment."

Market Cap to GDP Ratio

Definition:
A ratio used to determine whether an overall market is undervalued or overvalued.

Market Cap to GDP = (Market Capitalization of the Country/GDP of the Country)*100

Significance
 The result of this calculation is the percentage of GDP that represents stock market value.
Typically, a result of greater than 100% is said to show that the market is overvalued, while a
value of around 50%, is said to show undervaluation.
 It’s a logical conclusion that the economic output of a country and the earnings of its
companies, and so their valuation, should bear some relationship to the attraction of
investing or not investing.

Ratio = Total Market Cap / GDP Valuation

Ratio < 50% Significantly Undervalued
50% < Ratio < 75% Modestly Undervalued
75% < Ratio < 90% Fair Valued
90% < Ratio < 115% Modestly Overvalued
Ratio > 115% Significantly Overvalued
 BSE market capitalization to GDP
( in %)
112.13
100.93
94.35
89.14 89.67
80.14
10 – Year Average 78.17 74.06 70.36
68.04
57.16 58.19
45.81

FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 22 May'
14

Source: Bloomberg, BSE, CMIE.*based on FY14 GDP data

The debate on whether there is any relevance to the market capitalization to gross domestic
product or GDP ratio rages on, however we feel it is an important tool to gauge the overall
attractiveness of stock market in any country.

Mutual fund investments are subject to market risks, read all scheme related
documents carefully.