Market capitalisation-to-GDP ratio serves as a good indicator in determining how overvalued or undervalued is a particular stock exchange. Based on World Bank data, in respect of year 2016, Malaysia has market capitalisation to GDP of 121.4%. Is this considered overvalued?
The following graph shows the market cap-to-GDP for the selected ASEAN countries, namely: Indonesia, Singapore, Malaysia, Thailand and Philippines. Since 1997-1998 Asian Financial Crisis, Malaysia’s market cap-to-GDP has been relatively stable (i.e hovering between 100%-150% band). For Singapore (a developed nation), it has the highest market cap-to-GDP at 215.6% (2016) whilst Indonesia has the lowest ratio (signalling significant growth potential). In general, as the country develops, the market cap-to-GDP tends to trend higher (due to slower growth).
Is Malaysia overvalued?
There is no right or wrong answer. Strictly for educational purpose and based on simple statistics analysis, at market cap-to-GDP (2016) of 121.4%, it is quite close to the mean (i.e risk of overvaluation may not be significant). I will be personally more concerned if the ratio has gone above 174.0. Nevertheless, we should remain cautious as the FBMKLCI has risen significantly since the beginning of 2017. Further, we need to ascertain whether the growth of Malaysian GDP is able to catch up with its stock market.
So which exchange is potentially overvalued?
Across the globe, the story is quite different for the US market. The market cap-to-GDP for USA has risen significantly to 147.3% (2016). I believe that the current ratio could even be higher for 2017 if its stock market continues with its uptrend trajectory.
If you see the distribution range for historical market cap-to-GDP for US market, it is quite obvious that the US stock market is currently running ahead of its growth fundamentals (GDP). Hence, the risk of potential overvaluation is relatively higher in this case.
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