Wednesday, July 2, 2014

Macro View Series: Cross Country Market Cap To GDP

Out of sheer lack of actions in the market (which I hope will change with the NFP and ECB tomorrow, the ADP came in great today), we take a look at cross country relative equity valuation. That is basically a vague sounding smartspeak for checking out the market capitalization of listed companies (as a % of GDP). Market cap to GDP is a quick and dirty way to compare fundamental valuations across countries, assuming fundamentals matters in your trade horizon (so we are talking long term here). Of course, this ratio will be influenced by, among others, share of unorganized sectors (inversely proportional) and proportions of productive companies listed (directly proportional), and claim on other countries' GDP (like Switzerland - a home of many multinationals, directly proportional)

We look at two aspects. First, the market cap to GDP vs real GDP growth rate - this kind of gives how the market prices in the expected growth in earning vs price. 

Also we look at the ratios with comparison to investment share of GDP. Note the countries are presented using internal country code (ISO 3166) here.

From the above we see a certain patterns. Most economies lie with reasonably narrow band no the 2nd chart. Look at the outliers - like on richer side Switzerland and Singapore. Both are financial hubs and home of many multinationals. So we naturally expect the market cap to GDP ratio to be higher. However, the South African and Malaysian markets are suspect of overvaluation. On the cheaper side you have Venezuela, Argentina and China. Venezuela and Argentina have their own pressing problems. And China is, well, China. So hop over them, and you see the suspects for cheap valuation: Kazakhstan and Czech Republic

Now the fun is to look in to more details of the specific economy and convince yourself. Happy hunting!

And here for the tail piece: the market cap to GDP ratio for India and US over the years (approximated from BSE 500 and S&P 500 market cap respectively)

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