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Have Indian equities overshot the economy? Not only are markets scaling new highs daily, equity premia over emerging market peers is also rising. All this against the backdrop of a sub-5% economic growth seems to suggest they have run ahead of fundamentals. However, international investors do not seem to have discounted India’s share in world economic output. As the chart shows, India’s share in global gross domestic product (GDP) is expected to touch 2.6% this year. But the country’s share in world market capitalization is lower at 2.31%. This is despite a 50 basis points increase in this ratio after the sharp market run-up in the first six months of 2014. Markets are forward looking and one way of interpreting the data is to say that investors are seeing much higher economic growth elsewhere than in India. But that doesn’t quite fit in with the narrative of a cyclical recovery in India driving economic growth helped along by structural reforms by the new government. Despite short-term hiccups, India and China are still believed to be the drivers of world economy in the long run. Of course, the gap between the share of market capitalization and GDP could be bridged by new share sales. But this also means Indian equities’ valuations are low. At the end of the boom period and even as recently as 2010, India’s share of world market capitalization was higher than its share of economic output. The chart shows that in the initial years of the last bull run, or from 2004 to 2006, India’s share of market cap was lower than its share of world GDP, propelling the market upward. In other words, this particular piece of data suggests that there is further scope for Indian equities to continue the current rally.

Read more at: http://www.livemint.com/Money/D0MVRTFgl1gRhLVZ7HD75L/Indian-contribution-to-world-GDP-not-yet-marked-to-market.html?utm_source=copy