• APRIL 19, 2003

Market capitalisation: A study

Market capitalisation is a good indicator of the health of capital markets of an economy. Leading economies of the world have huge market capitalisation in relation to their gross domestic product (GDP). This indicates not only the investor confidence, domestic and international, but also the strength of their economies. In this article, we try to look at where India is placed.

Market capitalisation, as the name implies, in very simple terms, is the capital of a market. To begin with, market capitalisation of a particular stock is the total number of outstanding shares of the company multiplied by the share price of that stock. Thus, stock market capitalisation would mean the summation of the market capitalisation of all the individual stocks that are listed on the exchange.

On a narrower perspective, stock exchanges have indices based on various parameters e.g. BSE-30. As the name implies, BSE-30 consists of 30 stocks in the index. These stocks, from various sectors, are representatives or leaders of the sectors they belong to. Every index has a mix of a number of stocks representing various sectors.

India: Market capitalisation growth
  FY96 FY03 CAGR (%)
BSE 5,265 5,722 1%
BSE-30 1,449 2,414 9%
BSE-30 as % of BSE 28% 42%  
Source: CMIE

The market capitalisation of BSE has increased at a CAGR of 1% in the last 7 years. It must be noted here that during the same period, the number of listed companies on BSE has increased by 1% from 5,603 to the current 5,687.

It is believed that stock markets tend to reflect a true picture of the economy since companies from various sectors are listed on the exchanges. If the sector or companies’ perform well, investor’s tend to reward the company in terms of better valuations. This has a direct impact on the market capitalisation of the exchange. However, if we compare the GDP growth of our economy with the trend in market capitalisation in the last eight years, the relationship is rather weak. This is clearly visible in the chart below.

The broader reason could be due to various factors like East Asian crisis (1997), technology boom (FY00), stock market scams (FY01) and select domestic unrest (like Gujarat riots and Indo-Pak conflict in FY01-02).

Market capitalisation, in absolute terms, does not hold much relevance. However, market capitalisation as a % of GDP could be considered as a decent indicator for any markets. The chart above shows the movement of market capitalisation as a % of GDP for India, which currently rests at about 22% (off from its peak of 47% in FY00 due to the technology boom).

To put things in perspective, market capitalisation as a percentage of GDP is much higher for developed economies like UK and US. For these two countries, market capitalisation stands at almost 140% to their GDP. Among other economies like Germany, China and Japan, the figures rest at around 40%-50%. This is still higher than India. Let alone developed economies, countries like Hong Kong, Singapore and Taiwan are also attracting huge investments (over 100% of GDP).

Market cap. of leading economies
Countries Listed Cos. Mkt. Cap. (US$ bn)* % of GDP
USA 6,355 14,000 134%
UK 1,923 2,200 138%
Germany 988 1,100 52%
China 1,160 525 40%
India 5,795 115 22%
Source: NSE/S&P Emerging Markets

From a global perspective, the market capitalisation of all listed companies taken together on all markets all over the world increased by over 200% from US$ 9 trillion in 1990 to about US$ 28 trillion in 2001. The noteworthy fact here is that the percentage share of US in total world market capitalisation is almost 50% while that of India is a meager 0.5%.

World market capitalisation growth
  1990 2001 CAGR (%)
Developed markets 8,800 25,000 11%
Emerging markets 600 2,600 16%
Total 9,400 27,600  
Emerging markets as % of total 6% 9%  
Source: NSE/S&P Emerging Markets

Though India is tagged as one of the emerging economies, the statistics tell a different story. To put things in perspective, India's share in global funds (for investment by money managers) is at a measly 0.3% of the total funds that find their way into the stock markets. Also, as a percentage of the total funds allotted for the emerging markets, India's share stands at about 6%. These figures do not seem very heartening.

So, what is it that India does not have and is restricting the flow of money into the country? The reasons for this could be more than one. To start with, lack of political vision has been the key detrimental factor over the years. After economic liberalisation in early 1990s, successive government’s have failed to recognize the broader economic needs like health and education. That said, we have come a long way on many fronts. One only hopes that there is consistency in the long-term.

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