The great equity surge: Market cap-GDP ratio at 15-year high

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Galloping stock prices fuelled by an increasing participation of the masses have pushed valuations to such heights that India’s market-cap -GDP ratio has risen to 140.2% — a 15-year high, the Business Standard has reported. At the end of FY23, the ratio stood at 95.8%.

While the GDP at current prices rose around 10% since the end of FY23, the market capitalisation of all companies traded on the BSE has zoomed 61% since the same time.

BSE data show that on May 21, the cumulative market cap of all the 4,357 companies had a market cap of Rs 416 lakh crore. On the other hand the country’s GDP in FY24 stood at Rs 296.6 lakh crore.

Incidentally, the current market cap-GDP ratio was at its historic high in December 2007 when it touched 149.4%. However, the cumulative market cap of all companies listed in the BSE was only at Rs 71.7 lakh crore while the GDP was at Rs 48 lakh crore considering the past four quarters at that point of time.

However, that high went through a quick sobering period when stock prices underwent a sharp correction and the ratio dropped in the next 12-15 months to just about 54.8% at the end of FY09.

In the current scenario, the total market cap of 30 companies that constitute the Sensex is up only 27.2 per cent in the last financial year with their combined market growing from Rs 115.9 lakh crore at the end of FY23 to Rs 147.4 lakh crore on May 21.

If one considers the 50 companies Nifty 50, their cumulative market cap performed a shade better than those in Sensex – it rose 33.2% from Rs 136.5 lakh crore at the end of March 2023 and touched Rs 181.8 lakh crore on May 21.

The point to remember is that the traded value of the two indices implies the changes in the combined free-float market cap of non-promoters’ stake in companies as opposed to the full market cap of these companies.

The dramatic rise in the market cap-GDP ratio has triggered concern in many analysts who have advised investors to be cautious.

Founder and head of research at Equinomics Research, Chokkalingam G, said, “I would not have worried if the rise in the ratio was driven by large cap stocks that still account for the lion’s share of corporate profits in India, but the rally has been driven by small and midcap stocks. Most of these stocks have seen a sharp rise in their valuation in the past few quarters as their earnings have failed to keep pace with their mcap.”

A cursory glance at the midcap and smallcap indices would reveal the significance of the statement. The S&P BSE MidCap jumped about 64% in FY24 while the S&P BSE SmallCap rose 60.6% in the same period. A rising tide of investment, especially from a breed of new retail investors have helped the valuation in small and midcaps to rise to record levels.

Chokkalingam said about 10 crore new domestic retail investors have entered the equity market in the past five years. Significantly, most of them have put their money in small and midcap stocks with scant regard to the valuations and fundamentals of the stocks.

In FY24 about 3.7 crore new demat accounts were opened, which takes the figure to more than 30 lakh accounts a month or more than 1 lakh account a day. This was the biggest rise ever in the number of demat accounts opened in this country.