In today’s blog we bring you a brief analysis of the total market capitalization of listed companies as a % of GDP in countries from the region. The historic GDP data was taken from the Word Bank’s latest available publications, while the market caps were taken from the statistics published by regional stock exchanges.
The Buffet Indicator
The market cap to GDP ratio, or the Buffet Indicator as it is sometimes referred to, due to the fact that it was popularized by the famous investor Warren Buffet, compares the market capitalization of all publicly-traded stocks on a single market with the country’s GDP. It was one of the indicators of the approaching storm and later the crises in 2008, which severely damaged the equity markets. As Buffett said, “The ratio has certain limitations in telling you what you need to know. Still, it is probably the best single measure of where valuations stand at any given moment ”so it is often used to determine whether the stock market is overvalued or undervalued. Note that the index considers equity investments safe as long as the ratio remains below 100%. Meanwhile, when the total market cap reaches the value of the entire economy equities are considered to be slightly overvalued, while values exceeding 100% suggest that the country’s equity market is overvalued. Note that views on this target values have been changing since the largest market in the world, the US one, has been exceeding the 100% mark for years.
Regional Markets Market Cap to GDP Ratio (%)
Source: InterCapital Research
When looking at the chart one can notice that all markets in the region have recorded a high ratio in the pre-crisis year 2007. In Croatia, the market cap/GDP was as much as 109%. However, after the financial crisis struck, the ratio declined substantially as we were witnessing a lot of companies losing the bulk of their value as well as initiating squeeze out and delisting procedures. With the ratio currently standing at 36.3% it is clear that the market still has enough room for fresh investments and that the current share prices have plenty of room to increase (according to this single indicator. Turning our attention to other regional markets one can notice that all of them have been slow to recover from the crisis, with most of them barely reaching half of their pre-crisis levels. Among these markets Romania proved to be leader with a ratio of 17.3%. It is worth highlighting the way that the Romanian ratio changed within the last year. As one can notice the ratio fell by 4% at the end of 2018, caused by the announcement of new tax burdens upon some of the country’s most profitable companies which resulted in a large scale sell off. However, as the initial scare proved to be somewhat exaggerated, the market started to recover which rose the ratio value by 2% since the beginning of the year. On the flip side Serbia continued to decrease, falling as low as 10.7%. Bulgaria represents an interesting case as the country recorded a significant hike in value during 2017, caused by a SPO of a real estate investment company, Capital Concept Limited, which exited the main market at the beginning of 2018.