The Sensex crossing the 18,000 mark is a milestone. However, the Indian market has already found itself amongst the leading markets in the world as far as the market capitalisation to GDP ratio is concerned. It ranks amongst the top countries in the world in terms of m-cap to GDP ratio, which is now at 1.35.
In other words, the market capitalisation on the stock exchange is more than that of the GDP recorded at current market prices for 2006-07. It had crossed the GDP threshold long back and now it threatens to grow. Value investors like the legendary Warren Buffett consider a m-cap to GDP ratio of below one as a sign of attractiveness. And when the ratio goes higher, it signifies overvaluation. But fund managers believe that this ratio, as an interpretation of valuation, is archaic. It is the potential of the market earnings growth that counts, they reckon. And even on these parameters, India looks a tad expensive as the Sensex price is nearly six times its trailing book value. And other BRIC countries trade at extremely low levels. Already, Brazil and China have scored a march over India as returns on both the markets are higher and these countries have a lower m-cap to GDP ratio. ?Going ahead, earnings growth trends will be the factor that will cause a re-rating of the Indian markets to take place.
