|»5 Minute Wrap Up by Equitymaster|
On This Day - 6 JANUARY 2010
When can India break this 2% barrier?
In this issue:
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Even if we take the case of countries like the US and China, their share of market caps have also got aligned to their share of global GDP over the last six years. As we stand now, for both the US and India, share of global market cap stands well above their respective share of global GDP. However, in case of China, stock valuations continue to remain at a discount to the country's GDP share. This anomaly can be explained by the higher profitability of the US and Indian companies as compared to their Chinese counterparts.
Note: Country market caps are representative of their benchmark indices
Nonetheless, that does not justify the premiums enjoyed by Indian and US companies over their economic might for long. As seen in the case of the US, the premium in stock valuation over GDP has corrected since 2003. This was as companies in emerging markets became larger and more profitable. It was also due to US' share of global consumption, trade and GDP shrinking.
India currently has just about 2% share of global trade, consumption and GDP. For Indian stockmarkets to have a higher share of global market cap in the future, we believe that the economy needs to move beyond 2% on all these other parameters as well.
He also observed that while the worst could be behind us, the global economy is still very vulnerable and assigned a probability of as high as 40% for a double dip recession. The vulnerability, he believes, is because of the fact that the banking sector, especially in the US has not yet accounted for the drop in value of assets on their balance sheets. Also, as per Roach, the US consumer, the driver of the global economy, has pulled back big time on his spending and this is the primary reason why global economic growth could be impacted for quite some time to come.
Now, China is gearing itself to enter big time into gold buying in the current year. The country is, in fact, expected to buy around 440 tonnes of the yellow metal during this year. This would be around 30% higher than the demand expected to emerge from India, long considered as the biggest consumer of gold in the world. But not anymore!
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