Stock market capitalization to gdp ratio

Stock market capitalization to gdp ratio

Posted: Dreamworker Date: 28.06.2017

The table below lists the total market cap to GNI GDP ratios for 28 major economies.

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Gross National Income GNI is used instead of GDP due to its closer relationship with stock market returns. Check the Global Valuations Database by Siblis Research for detailed historical data. Purchase full historical market cap to GNI data and do your own valuation analysis.

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The dataset includes a t least 15 years of monthly data for all of the 28 countries, going all the way back to for the largest economies. The database provides also historical CAPE ratios for the past 20 years. Based on the cap-to-GNI ratios, currently the cheapest markets in the world are the stock exchanges of Greece, Chile, Brazil, Spain and Russia.

Greece never really recovered from the financial crisis but entered directly to the center of the European debt crisis. Share prices doubled during the next two years but started to plunge again in March and are now in the same level as in June The same holds true for Brazil.

The largest economy of Latin America has entered recession and the current government is in the middle of multiple corruption scandals. Brazilian share proces have decreased sharply during the past one year but the investors might be overreacting and prices can be expected to bounce back sooner or later.

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The most expensive markets can be found from Japan, South-Korea, Thailand, South Arfica and Switzerland. The valuations of most of the Asian stock markets were extremely high at the end of The price levels started to decrease at the end of the year when the Shanghai stock bubble started to burst but the Asian markets are still looking expensive. Also the US and pan-European public companies are overvalued based on the market capitalization ratio.

In the table, the corresponding GNI for the total market capitalizations of Euronext is the combined GNI of France, Portugal, Belgium and Netherlands. Among the largest economies in the world, only UK is currently valued lower than its historical average. The total market cap TMC to GNP ratio, commonly known as Buffett Indicator , was popularized by Warren Buffett when he described it as the single best measure for the overall stock market valuation level at a given time.

In the article published in the Fortune magazine , Mr. Buffett was only talking about the US economy but the same ratio can be applied successfully to almost every other nation in the world.

stock market capitalization to gdp ratio

Some countries are characterized by a higher portion of publicly listed corporations when some have a larger portion of private or state-owned companies. The correlations suggest strong negative relationship between the ratio and stock market returns for almost all of the countries: This would suggest that TMC-to-GNI ratio is a powerful indicator of market valuations even though it offers no insights for short-term market movements.

However, a word of caution is in order. The correlation calculations include the period of the financial crisis when both the stock returns and GNI of practically all of the nations in the world were plummeting and the after-crisis period of fast recovery of both economic activity and share prices. If these periods are excluded, the correlations are slightly weaker but still more than significant. It is highly recommended for every investors to pay close attention to the cap-to-GNI ratios.

Ed Yardeni has pointed out some possible shortcomings of using the ratio to estimate the current market valuations. One potential problem is that Buffett Indicator does not take account structural changes in profit margins caused by e. Especially technologic advances have often been expected to lift corporate profits to a entirely new level but the evidence for this has remained mixed.

Yardeni states, there is no perfect indicator and stock valuation is always somewhat subjective. The best option is to follow multiple metrics and make your own conclusions about them. The most common practice is to use GDP when calculating the cap-to-economy ratio but using Gross National Income GNI gives more accurate results.

GDP takes only account the domestic economic activity inside a country. In majority of the cases, the difference between GDP and GNI is quite minor. This means that the outflow and inflow of income are balanced.

The same is true for majority of the nations but there are exceptions. One notable case is Ireland that used generous tax policies to lure many multinational corporations to set up their headquarters to the country.

Gross National Product GNP and GNI are quite similar concept and there are only small differences in the way they are calculated. The main difference is that GNI takes account income and taxes earned also by citizens permanently living abroad while GNP only measures the earnings of domestic citizens. The GNI has largely replaced the use of GNP since the World Bank begin calculating and publishing GNI figures instead of GNP. There exists also other popular methods for estimating market valuations.

For United States, Z.

The average value for the ratio between and is 0. Q-ratio would also suggest that US stock market is currently overvalued. Maybe the most followed metric especially for US stock market is Shiller PE , also know as CAPE ratio. Shiller PE can also be used to estimate the valuations of different sectors.

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