Read on Twitter
"% of GDP"- see this sprouting everywhere- be it market cap of Apple to GDP of India or IPO funding of ANT to GDP or the even more sacrilegious reversal of cash as % of GDP over last few yrs.But is it even worth comparing any of these,let alone analyse trends of the same?
Mkt cap of company is value of the wealth of company (stock variable) over the years,while GDP is a revenue proxy(flow variable) of country over say one year. Is there anything to suggest valuation of wealth of company should be related to economic activity in another country?
Wealth to Income ratios are important trends to consider, but needs to be seen in context of income growth, asset allocation choices of savings and returns from savings. Some perspective of wealth to income trends (global and India) can be found here https://twitter.com/hktg13/status/1256654853591445506?s=19
Is there any sanctity to amount of times, say a shopkeeper funds her inventory turns in a year to revenue of her store? Similarly is there any sanctity to see cash as % of GDP or as short term financing of an IPO to economic activity of a country?
Digital payments used to 6 times our GDP in FY15 & has moved to 8.5* times GDP in FY19. In EU, this ratio is roughly 12* GDP. So rather than obsess over cash as % of GDP, we need to see cash as % of payments and see how trends are evolving?
Market cap to GDP(Buffett indicator) may hv some utility,but in a world whr biz activities r more global & more profit pools come from overseas,will past trends hold?Listed India Inc(ex fin)sales r 25-30% of GDP, as more cos list, shouldn't ratio hv upward skew?
Critique of Buffett Indicator for US markets is documented here
https://www.advisorperspectives.com/dshort/updates/2020/11/05/market-cap-to-gdp-an-updated-look-at-the-buffett-valuation-indicator
https://www.advisorperspectives.com/dshort/updates/2020/11/05/market-cap-to-gdp-an-updated-look-at-the-buffett-valuation-indicator
In an emerging market like India with an evolving financial markets, maybe utility of "Buffett Indicator"(which is more or less Price to Sales Proxy) may better help identify cheapness of markets than over-valuation, due to persistent upward drift over time?
This is not to suggest that this indicator should be ignored etc, but to provide a perspective that one needs to combine such inputs along with others to possibly help in asset allocation...and yes, hopefully people stop this fad of comparing everything to "% of India GDP"?
