Sunday, July 6, 2008

India tops in erosion of market cap

Continuing with our discussion on the stock market erosion in India, the equity values of the Indian stock market has gone down by as much as 42 per cent till now this year, giving the nation the dubious distinction of the worst performer among the emerging markets around the globe. When the losses are calculated by the foreign institutional investors, the losses would have been higher given the depreciation in the value of Indian rupee against the US dollar adding another 4% and the net loss would be 46% when measured in dollar terms. The fall is steeper in the small and mid cap stocks than the large cap stocks.

The current market cap of Indian stocks account for $968,526 millions after the erosion. But take some respite from another country that really performed poorer when compared to India. That country is Vietnam. Another regional neighbor that competed with India in economic growth too competed in the stock melt down is China which lost a whopping 42% worth, comes next to India.

Among the emerging markets in the Asia Pacific region, Australia and Brazil somewhat fared better and we can say they resisted the correction which blew through the entire globe. Their commodities fared well even during the correction phase.
To everyone’s surprise, the country responsible for the global melt down, the US with its sub prime crisis, has just shed 15% of its market cap and behaved in a very mature manner during the progress of the correction phase. Among the other developed nations, Japan lost only 9% of its market cap.

Here is a table showing the degree of erosion of wealth in different countries

Country Decline in Market Cap (%) Market cap to GDP ratio
India -46 0.9
China -42 0.4
South Korea -25 0.9
Hong Kong -24 9.0
US -15 1.3
Japan -9 1.1
Australia -8 1.2
Brazil -3 0.7
Mexico -0.5 0.5
Argentina 2 1.8
Source : Bloomberg

The Indian stock market capitalization overtook its GDP value for the first time in October 2006 and it went up to 1.8 during the market peak of January 2008. Another prominent player in the market is South Korea whose market cap to GDP ratio has gone down to below 1 in the recent correction. You may ask a question at this juncture? Whenever the value of GDP-market cap falls below 1, will it make the Indian stocks (or South Korean stocks) attractive? But the investment guru Warren Buffet is of the opinion that the value of less than 1 is a good indication about the attractive nature of any economy.

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