India crossed $3 trillion market cap, what does that mean?

download India crossed $3 trillion market cap, what does that mean?

In the midst of all the debate over stock market levels and valuations, the BSE market cap crossed $3 trillion. Yes we are considering the BSE market as there are over 4500 stocks listed on the BSE and hence it is a lot more representative of the spread of the Indian capital markets. Of course, this is also dependent on the dollar value. In fact, when the Indian markets scaled the $3 trillion mark for the first time in late May 2021, many experts had thanked the dollar strength for the same. Experts even remarked that had the dollar been at Rs75/$, instead of Rs.7230/$, India would still have been short of the mark.

But that is off the point. The fact is that at least in rupee terms as of the end of May, India did scale above $3 trillion market cap and even today with the rupee at around 74.40/$, the Sensex market cap continues to hold above the $3 trillion mark. But, why is this number of significant and is it just a number along the journey? Let us look at four interesting aspects of the market cap at $3 trillion with GDP at 2.8 trillion.

India ranks eighth on the market cap sweepstakes

Interestingly, at $3 trillion market cap, India is the eighth most valuable market in the world. In fact, only the US, Japan and China are way ahead of the rest of the pack. The other Global markets with market cap greater than India are UK, France, Hong and Canada. Hong Kong is an extension of China and Canada has largely leveraged the recent commodity story. Comparatively, India’s market cap looks a lot more solid. In short, there is not much to choose between the fourth rank and the eighth rank on the market cap rankings and these rankings can change any time in favour of India.

Tracing the journey to $3 trillion market of Indian markets

For those of you who remember the heady bull rally between 2003 and 2007, it was in 2007 that India for the first time scaled the $1 trillion market cap mark. However, that was followed by a massive crash in the markets and it took a full 2,566 days to add another $500 billion in market. India in fact, touched the $1.5 trillion market only in Jun 2014, just after the Modi government had assumed charge at the centre. The subsequent journeys to add $500 billion were relatively quicker. For example, India touched $2 trillion in market cap in July 2017 and $2.5 trillion in December 2020, just before COVID struck.

Now coms the most surprising part of the journey. Between Dec-20 and May 2021, in a span of just 159 days, the Sensex added the next $500 billion. That is the fastest addition of $500 billion in market and this happened despite the Sensex losing over 34% due to the pandemic. The last phase best captures how the $3 trillion mark on the Sensex market was achieved in the shortest time frame possible.

Which companies helped the Sensex add $1 trillion?

That is an interesting question. Between July 2017 and May 2021, it took a full 1,414 days for the Sensex to add $1 trillion in market cap. The question is which are the companies that helped in this journey. Here is a quick sampler of the big drivers. Reliance Industries added $70 billion in 1,414 days while TCS added $74 billion in this period. The HDFC twins added $102 billion between them while Infy, HUL, ICICI Bank and Bajaj Finance added another $100 billion between them. The formidable growth engine of the Adani group added $90 billion to the market cap during this period while technology stories like HCL Tech, Wipro and Airtel added another $60 billion. In short about 8 stocks added close to $500 billion out of this $1 trillion accretion with the balance accretion spread across all stocks. That is a lot of value created by mid-caps, small caps and IPOs and that is makes this value accretion different.

What does the Buffett ratio say, is it comfortable?

Buffett ratio is the ratio of market cap / GDP and is considered a good benchmark for overall valuations. How does the Buffett ratio look like in the Indian context? Look at some comparisons. India’s Buffett ratio is just 102% as against 559% for Taiwan, 324% for Saudi Arabia, 304% for Switzerland, 222% for the US and 180% for Canada. Even if you look at the global average Buffett ratio, it stands at 129%, so Indian markets are almost 2700 basis points cheaper.

So, if you are getting worried about $3 trillion in market cap, you can relax as the Buffett ratios is still eminently attractive.

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