Market cap-to-GDP ratio likely to improve to 80% in FY21

The market cap-to-GDP ratio of India is likely to recover in the current financial year (FY21) to 80 per cent, after a drop in FY20, said a report by Motilal Oswal Institutional Equities.

The “BULLS & BEARS (November 2020): India Valuations Handbook” noted that in the last financial year, the market-to-GDP ratio fell to 56 per cent from 79 per cent in FY19.

“Market cap-to-GDP ratio has been volatile as it moved from 79 per cent in FY19 to 56 per cent (FY20 GDP) in Mar’20 to 80 per cent now (FY21E GDP) — above its long-term average of 75 per cent,” it said.

The report, however, said that India’s share in world market-cap is at 2.3 per cent, below its historical average of 2.5 per cent. Over the last 12 months, world market cap has increased 9 per cent ($7.3 trillion) while India’s market-cap has remained flat.

It further said that the Nifty is trading at 12-month forward return on equity (RoE) of 13 per cent, below its long-term average of 13.8 per cent.

Last month, India was among the positive-performing markets globally. In October, markets in Indonesia (up 5 per cent), followed by India (4 per cent growth) and MSCI EM (Emerging Markets) (up 2 per cent) closed higher in local currency terms.

On the other hand, Russia (down 9 per cent), UK (5 per cent) and the US (down 3 per cent) were the major laggards.

“Indian equities are trading at 24X FY21E earnings. Brazil is the only market trading at a premium, while other key markets continue to trade at a discount to India,” it said.