China overtakes India on m-cap to GDP ratio

China now world's second largest share market, India is 7th

Dalal Street is losing its exceptionalism to Shanghai. Historically one of the hottest stock market in the emerging world, with a market cap to gross domestic product (GDP) ratio matching the developed markets, India has passed on the baton to China.

The combined market cap of listed companies in China is now equivalent to 80 per cent of the country’s latest annual GDP (on current prices) against India’s 76 per cent. In the past, India has been ahead of China, with a historical average (since March 2004) market capitalisation to GDP ratio of 73 per cent, higher than China’s 45 per cent ( see chart ).

The 3,000-odd companies actively listed and traded on the BSE exchange are collectively valued at $1,580 billion, against the country’s nominal GDP of $2,072 bn in FY15, at the current rupee-dollar exchange rate. In comparison, 1,100-odd companies listed and traded on the Shanghai Stock Exchange are now valued at $8,067 bn against the country’s nominal GDP of around $10 trillion in FY15. India continues to lead other emerging market peers such as Brazil, Russia and Turkey on the market cap to GDP ratio. South Africa is the exception, with a ratio of more than 100 per cent, thanks to the listing of global majors such as BHP Billiton and British American Tobacco. In contrast, other markets mostly house local companies. Historically India’s market cap to GDP ratio is comparable to developed markets such as France, South Korea and Japan, and below that of the US and UK.

The rise of China is largely due to a sharp rally in Chinese stocks. The Shanghai market is up 150 per cent since March 2014, against a 27 per cent rise in the market cap of BSE-listed companies in the period.

A typical Chinese company is now 14 times bigger than its Indian counterpart in market capitalisation. A typical company on the Shanghai Stock Exchange is valued at $7 bn (Rs 45,000 crore) on average, against one of $500 mn (Rs  3,300 crore) on Dalal Street .The analysis is based on the latest and the year-end market cap and nominal GDP (in dollars) of the world’s top developed and emerging markets. The figure excludes the stock markets in Hongkong and Singapore, as many of the companies listed in these bourses have operations elsewhere in the region and their valuation doesn’t reflect the local economy.

“There is a bubble-like situation in the Chinese market,” avers G Chokkalingam, founder & chief executive of Equinomics Research & Advisory, “with a sharp rally in even financially stretched firms such as steel producers, which face a global downturn in demand and profitability. Besides, all projections point towards a growth slowdown in China, which is negative for local stocks.”

If there is a bubble, it's not visible in the valuation ratios of the Shanghai market. China’s benchmark Shanghai SEE composite is now valued at 21.6 times its trailing earnings, similar to the BSE Sensex.

What has changed is that there has been a sharp re-rating of stock valuations in the mainland. Till a year before, the Shanghai market was trading at a nearly 50 per cent discount to the valuations on Dalal Street. For the three years ended September 2014, the Shanghai SEE composite was trading at a price to earnings multiple of 10-12x against the Sensex PE multiple of 18-19x. Thanks to the rally, China has overtaken Japan and Britain, to emerge as the world's second largest stock market behind America's, in line with its relative position on the GDP league table. India now has the seventh largest stock market, behind France and Germany but ahead of South Korea and Brazil.