Market capitalisation to GDP: Is the Buffett ratio giving us any signal?
Going by this ratio, different countries in the world have different moments of overvaluation. Japan in 1997-90, Singapore in 1993-94 and again in 2006-07, China and India in 2007, UK in 2007 and 2014.
Going by historical averages, stock markets of several countries are now in the overvalued zone. Overvaluation / undervaluation can be measured either by using standard deviation from historical average market capitalisation to GDP. The other measure could be a simplistic above 100% meaning over-valuation and below 100% being under valuation.
Going by standard deviation, Japan appears to be in the very highly over-valued zone while several countries like the USA, France, Germany and South Korea are in the highly over-valued zone.
What does it indicate?
Countries in the zone
Average to 1 Stdev
Overvalued
India, Canada. Indonesia
1 Stdev – 2 Stdev
Highly Overvalued
USA, France, Germany, South Korea
Over 2 stdev
Very highly overvalued
Japan
Around the Average
Fairly Valued
China, UK, Philippines
Average minus 1 Stdev
Under valued
Singapore
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