Oct 26th ,2016
Market view: What does market cap-to-GDP tell us?
(Thien Bui – Ext: 1321)
On October 5th, the market cap of Vietnam stock market, including HSX, HNX and UPCOM, had reached the all-time high of VND1.68 million billion, equivalent to 55% GDP of 9M2016. This brought us to a well-known ratio created by Warren Buffet to measure how “hot” the market is: Market Cap to GDP. Using this ratio, this article will focus on the HSX market capitalization to thereby evaluate whether VN-Index is currently undervalued or overvalued.
Typically, in developed markets such as US, many institutions divide their rating scale of “Market Cap to GDP” as follows:
As Vietnam market is currently classified as frontier market hence it is not applicable to use those criteria. Indeed, we try to calculate the ratio for Vietnam and have some distinct conclusions for Vietnam market, especially the VNIndex
We can withdraw 2 conclusions from the above figure:
- We can withdraw 2 conclusions from the above figure:The common range of the ratio is from 22% to 30%.
- The movement of the indicator and VN-Index is fairly identical. When the indicator fell to very low levels, like in 2006 (~ 14%), it quickly bounced back to 22% -30% zone. And then, when it reached the peak of 30% during 2007-2008 period, VN-Index also set its all-time high of 1,072 points, only to freefall for the whole year. The index eventually hit the bottom (281 points) in 2009, when the indicator posted a record low of 9%. Since then, they both went up. From 2011 to the present, the identical trend between VN-Index and Market Cap to GDP still continued.
Current market cap/GDP is around 30% – 32%, which is the 10-year height. We can say that current market is quite “hot” and there is a high possibility that VNIndex will decline. Evidently, recent sessions are proving that the ratio market cap to GDP still holds true at this moment.
We also try to use this indicator to forecast VNIndex. Under the assumption that real GDP in Q4 will grow 6.3% y-o-y according to Government’s plan, we expect the denominated GDP in the last quarter of this year could grow 7.7% y-o-y. Besides, we run a simulation that market cap/GDP fluctuates between 22% and 30%, The highest frequency is that VNIndex could close at 650 – 660 pts by the end of this year.
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