Monitoring the NaMo Bull Market in Stocks: When will it enter bubble territory?

Total market value of stocks (total market cap.) listed on BSE as a percentage of GNP estimated at 78%.

Indian Stock Market Watch

My understanding is that there needs to be a reasonable relationship between the total market value (total market cap.) of Indian stocks and GNP. Long run investors could keep a watch on this relationship along with other indicators in order to gauge whether Indian stocks are cheap or expensive. This metric is is watched by Warren Buffet, the renowned investor.

GNP is a measure of activity of the economy – the output of goods and services in a particular year. The total market value of Indian stocks expresses the market value of savings ploughed in by investors in the stock market.  On the flip side, it expresses the market value of money raised by companies through the stock market to provide goods and services to consumers.  If the market value of money raised by companies (or that put in by savers) is completely out of line with the goods and services being produced by the economy then something is amiss.

The chart below shows the total market value of stocks (total market cap.) listed on the BSE as a percentage of GNP at market prices. The chart also shows how the market has performed, using the BSE100 as a yardstick.  I have not taken the Sensex, as the BSE 100 is more broad based. The total market value of stocks listed on the BSE covers to my understanding the predominant share of all stocks listed in India – a fair guide then of the total market value of Indian stocks. The yardstick for economic activity I have taken is GNP at market prices since it also includes net income - received and paid - earned from abroad, and since market value of BSE stocks includes money put in by foreigners.

When the total market value of stocks listed on the BSE as a percentage of GNP is in the region of 40 to 60%, history from 1993 suggests the market is cheap.  When the ratio is 100% and above, history suggests the market is expensive.

The percentage is currently estimated (June end) to be around 78 %, having risen sharply from 62% in February this year once the market sensed a Narendra Modi led BJP victory.  This suggests the market is not yet expensive, but nor is it cheap.

During the last decade, at the peak of the bull market in in Dec 2007 (pre financial crisis) the percentage stood at an estimated 149%. Then when the market bottomed in February 2009, the percentage fell to 52%. As the market recovered in this decade, the percentage rose again to 100% in September 2010, close to the last peak in the market in December 2010. Then market fell again when various governance issues facing the Indian economy became a significant headwind to the growth of the economy, and the percentage fell to the 60% area in August 2013.

The Economic Times of July 7, 2014 had a front page headline titled “Sensex May Scale 31,000 by March Next Year”. Any guesses on what the total market value of stocks listed on the BSE as a percentage of GNP   would be then?