In the commentary Mr. Kirby compares the stock market capital capitalization of China and US and compared them both to their respective GDP.
For China, Rob Kirby made the following remarks.
- While the notional value [U.S. 500 billion] is very dated – it’s the percentage of GDP that I would like to draw everyone’s attention to – namely and explicitly, the market capitalization of the Chinese Stock Market as a percentage of GDP – 30%.
Now, let’s consider that Chinese GDP data are “suspect” – owing to their arbitrarily and, as some would argue, artificially [manipulated] low currency “peg” to the U.S. Dollar – and as a result – Chinese GDP data are, in fact, under-reported.
And for the US, Mr. Kirby made the following comments.
- With U.S. GDP running around 13 Trillion, we can CLEARLY see that stock market valuations [combined NYSE and NASDAQ] are running at 26 Trillion – or 200% of U.S. GDP!
So he asks, "So whose stock market is over-valued now?"
What say you?
Using the ratio of GDP-to-market capitalization as indicator of valuation of markets are quite flawed and misleading. Offhand I can think of at least 2 points to refute it:
ReplyDelete1) Much of the China economic activities and value are still contained in those private/unlisted companies, whereas, I assume, most notable US companies are already listed. I argue that while those unlisted Chinese companies are valuable, those listed companies are overvalued (PE of Shanghai A-shares are about 40x).
2) China stock market is pretty much limited to their own people, foreign investors, even via indirect avenues, do not constitute a significant portion of input to her market. OTOH, US market capitalization is substantially contributed by foreign investors, e.g, Arab tycoons
My Dearest KK,
ReplyDeleteYes, I do believe that you have made one strong point.
GDP versus market capitization is simply a funky way to use as a gauge.
And more so if you consider the many ways a GDP can be represented....
rgds
While GDP-to-market capitalization is not an indicator of valuation of stock market, it is, however, a good guide as to the wealth effect of stock market performance.
ReplyDeleteIn those countries where their people put in substantial proportion (18-30%) of their money in stock markets, "Wall Street" crash certainly affects "Main Street" (small business and general economic activities) and consumer spending. I read that in Asia, only Taiwan, Hong Kong, Korea and Singapore demontrate this effect.
That is why, though I think China stock market is overvalued, I don't quite buy the claim that China stock market crash (even if severe) per se will greatly affect China economy or global economy. China stock market capitalization is less than 5-7% of its people's savings. The wealth effect of stock market is not significant there, yet.
(Japenese great bubble burst in late 1980s is much more severe because it was a combination of stock market crash from P/E of 100x, property market crash, over-expansion of business, and rapid rise in Yen valuation. In contrast, China market has P/E of 40x; the hot property markets are limited to majot cities; their business expansion are in early stage of growth, and Chinese government knows very well not to let Yuan apprecaite rapidly.)