Is our share market Undervalued or overvalued? See what present Market Cap. to GDP ratio says

As Warren Buffet has said –“The stock market is a device for transferring money from the impatient to the patient.” And the law of patient says Good things take time.

When we want to evaluate fundamental aspects – We should try to have broader aspects. Fundamental Analysis is more effective in the long run.

Here we have tried to measure one simple but very powerful indicator which helps to measure whether the market is overvalued or undervalued.

Market Cap to GDP ratio: This ratio is calculated by dividing the total market capitalization of the share market to the GDP of the country.

Market Capitalization is about the sum total of the market value of all listed stocks in the exchange. The current market Capitalization of the Nepal share market is around 16 kharba.

GDP (Gross Domestic Product) is the value of the country’s total output. It is the monetary value of all finished goods and services made within the country. The Current GDP of our country is projected at around 35 Kharba this year.

When we divide the Market Cap to GDP we get a ratio. What's the value indicate is mentioned in the table below.

The above table says that if the ratio is below 50%  we can conclude the market is in the undervalued zone. Similarly, the ratio between 50% to 75% shows that market is in the modestly undervalued zone. If the ratio is between 75% to 90%, then the market is modestly overvalued, and at last, if the ratio is between 90% and above then the market is in the overvalued zone.

Now let us look at what is the value of this indicator in Nepal. All these figures give a rough figure as to whether the market is in the overvalued zone or in an Undervalued zone.

If we look at the estimated GDP ratio to Market Cap at the current period, the ratio is around 40% which indicates the market is in the undervalued zone.

Similarly, the ratio was highest in 2072/73 at that time market was near to all-time high of 1881. The ratio was around 84%.

Now let us look into some highlights of this indicator in another country-

• The current ratio of total market cap over to GDP for the USA is 151% which indicates the USA stock market is significantly Overvalued.
• Similarly, the current ratio of total market cap to GDP for India is 56.19% which indicates the market is in modestly undervalued Zone. The historical low of this indicator for India was 40% and the historical high of this indicator for India was 158%.
• Similarly, for china, the historical highest ratio of this indicator was in 2007 and stood at 126.2%.
• By looking at all these figures, We can see that our share market in the current period is undervalued Zone.

Bishal Kumar Agrawal, CA & MBA, Symbiosis