Once in a while, we compare India’s share of world gross domestic product (GDP) with its share of global market capitalization (m-cap) to find whether the equity market is indeed pricing in the growth of the economy.
This time, we’ve used the International Monetary Fund’s (IMF) World Economic Outlook database for the GDP numbers. As has been mentioned earlier in this column, we find that there were strong fundamental reasons for the boom in the stock market between 2003 and 2006, because, as the chart shows, India’s share of world m-cap was far below its share of world GDP during these years.
Also See A Rebalancing of Global Markets (PDF)
That changed in 2007, when our market overshot and our share of m-cap became far in excess of our share of global GDP. The chart shows that, after a dip in 2009, our share of m-cap once again was much higher than our share of GDP by end 2010.
That led to a correction; as on 28 June, India’s share of global m-cap had fallen to 2.8%. According to the estimates given in IMF’s World Economic Outlook database, however, India’s share of global GDP for 2011 would be 2.5%, while it would be 2.6% in 2012. In other words, although our share of m-cap is still higher than our share of GDP, the gap between the two is even lower than what it was at the end of 2009. That augurs well for the Indian market, although the upside may be limited.
Note, however, that the Chinese market is even better placed. As the chart shows, except for 2007, its share of global m-cap has been consistently below its share of world GDP. Its stock market, too, has not done well this year; as a result, its share of global m-cap was 7.1% on 28 June, lower than where it was at the end of December 2010. According to IMF estimates, however, China’s share of world GDP is expected to be 9.5% in 2011 and 9.9% in 2012. That seems to indicate plenty of upside in Chinese equities, too, when the rebound comes.
But perhaps, what the chart shows most clearly is the process of rebalancing of the world’s markets, as America’s share of global m-cap declines to a number more in line with its share of world GDP.
Graphics by Yogesh Kumar/Mint
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