India share of global market capitalization narrows gap with GDP share
Although market capitalization has risen, valuations remain expensive in the absence of a meaningful recovery in corporate earnings
In 2017, India’s share of global market capitalization edged up after staying relatively flat for the past three years. The climb was on the back of a stellar showing by Indian equities, with key benchmark indices scaling new highs.
Consequently, India’s share of world market capitalization has inched up by 57 basis points (bps) to 2.93% from a year ago. One basis point is 0.01%.
This also narrows the gap with share of gross domestic product (GDP) to the smallest in five years.
A gush of domestic liquidity, especially after demonetisation, was among the key drivers of improved stock market sentiment.
Lower interest rates on products such as fixed deposits and a dismal performance by other asset classes such as gold and realty accelerated the shift to financial savings.
Fund-raising via initial public offers (IPOs) was in full swing this year, taking the total number of listed entities on the Indian bourses higher.
Indian companies garnered around Rs67,000 crore via this route. This gave a push to market capitalization as well.
Of the total market capitalization as of 26 December, IPOs contributed 3.5%, which is much higher than the 2016 figure of 2.17%, according to primary market tracker Prime Database.
While the stock market is chugging along, the situation on the GDP growth front is a bit different.
India’s contribution to world GDP has been constantly rising since 2014, but the improvement from a year ago has been a meagre 8 bps.
With the 1 July implementation of the goods and service tax (GST), which came close on the heels of demonetisation, hitting business confidence, overall growth was affected.
Small and medium enterprises operating in unorganized sectors were the worst affected. Also, global peers are growing at a faster pace than India.
“Euro zone is now recovering; Japan and the US too are growing at a higher rate. US Federal Reserve hiking rates and European Central Bank rolling back stimulus indicates that these economies are confident of their growth,” Madan Sabnavis, chief economist at Care Ratings, said. “IMF (International Monetary Fund) projects world economy to grow from 3.2% to 3.6% in FY17-18, whereas it foresees India’s GDP growth slowing down to 6.7% from 7.1% in FY17-18, which is a sharp contrast. Expectations are that India’s GDP growth is likely to come down further since GST will require a couple of months to stabilize.”
A note of caution is necessary on the stock market front.
Although market capitalization has risen, valuations remain expensive in the absence of a meaningful recovery in corporate earnings.
If earnings don’t show signs of picking up in the coming quarters, valuations may come under pressure.
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