Saturday, March 24, 2012

Market to GDP Ratios - Can Australia Soar?

The Australian market could soar based on its current Market Capitalisation to GDP percentage ratio. Australia's ratio is the closest to its medium term minimum of 21 markets considered at GuruFocus' Global Market Valuation page (

The whole page is worth a read as it considers GDP growth, dividends in addition to the historical range and current Market to GDP before projecting a growth rate for the stock market over coming years. While I think there may be significant diiferences in outcomes to those projected, the methodolgy and inputs are worth consideration.

The chart on historical GDP growth alone is worth a look:

Does Market to GDP compared to the prior low show Australia will soar?
Here is our current interest, the current ratio of Market to GDP ("M/G")  compared to medium term historical minimums of that percentage. Colours generally help identify the 6 highest and 6 lowest in each column. In the "Years" data column it shows those that might not have a single full cycle and those that clearly have multiple cycles, although only the US data has 1974 and the first oil shock.

From the table above, Australia is the country with the lowest  ratio of current M/G to historical low M/G in the years covered by the data. (Column "Now / Min")

11 countries are closer than Australia to the highest M/G ratio (Column "Now / Max") they have had in the years covered by the data and 9 are further from the historical high so Australia is near middle of the range on this measure.

We should note however that Australia has the second highest historical minimum after Singapore and so could be being rerated internationally because of concerns re housing markets, near extreme high resource prices and currency about 2 standard deviations above long term trend against USD.

If you are looking for a country that has likely above average GDP growth and a low M/G ratio compared to its historical low and in relative terms, China is worth watching.

If you think that Europe will move over time to improve its outlook and grow then Italy and Spain are near their historical lows.

Or Is It A Warning?
One could take the view that the countries regarded by the international investing community as likely to have worse problems  in the near future are the ones with the lowest "Now / Min". If China has a hard landing it would certainly have a bad impact on Australia, and we already know that Italy, Spain, Belgium and France have problems already and they are likely to have shrinking GDP or zero growth if austerity is maintained.

As an aside, if the low M/G is a warning it seems that few believe that US will impose austerity in 2013 as is  the outcome of budget deals already done, defaults on reaching deals and expiring Bush tax cuts. The table below from the Congressional Budget Office shows the dramatic austerity based on current settings. I have little doubt that budget outcomes like these would cause a recession in the US before mid 2013 which would last till at least mid 2014 and that there would be little the Fed could do to alleviate it. If imposed it would be a "recession we had to have" to get debt under control.

                       2011    2012     2013     2014
Revenues        2,303    2,456    2,968    3,283
Outlays           3,603    3,627    3,580    3,668
                     _____    _____    ____    ____
Total Deficit   -1,300    -1,171    -612    -385

And of course, if the US goes into recession other countries either have to stimulate through increased budget deficits or will likely also have to endure recession (and have the automatic stabilisers increase deficits anyway.)

Note on methodology
Because of the differing ranges for differing countries and the apparently different average relativity of the Market to GDP (see Italy which is low at 22.5 and Singapore which is high at 254), I felt it was more likely to be meaningful to look at the ratio now compared to the low point in the ratio. On this measure Australia is the closest to its lowest ratio of Market to GDP based on the last 12 years data (which includes the lows of  of 2002 and 2009 (a dramatic low) and the highs of 2001 (a modest peak) and 2007 (a dramatic high in terms of 5 year growth and compared to GDP).

Notes re years of data 
The data for Australia does not capture the lows of 1974 or 1987 which might have had lower Market to GDP ratios, but these years are captured for some other countries, so some caution is warranted. The Data for all countries other than Belgium captures the 2007 high and 2009 low. The data for all countries other than Italy, Russia and Belgium captures the full cycle from the 2002 low through the 2007 high, 2008/9 low to this year.
The exact date of the last update of GDP figures is not known and so the potential variation is significant for countries that are contracting like Spain or expanding quickly like China.
The last update of the market capitalisation is not known and it is not known whether it is based on the ETF referenced or the total capitalisation of all publicly listed stocks.


  1. Great point about Asian markets. Much better regulated today

  2. We should be very careful on what we are doing on our business. Many investor thinks that what they are doing is healthy for their business but it is not. The business suffered a lot and it shown because it is not effective on the marketting strategy of the business. Maybe we should change our way for the better of the business to bounce back and get back on track.

    Real Estate Investment Australia

  3. Enhance our skills as a Real Estate Agent. Show what our skill is and learn different things that we get from our experience. It is our own choice if we will learn new things from a professional or not.

    Real Estate Investing Australia

  4. Hi,I have little doubt that budget outcomes like these would cause a recession in the US before mid 2013 which would last till at least mid 2014 and that there would be little the Fed could do to alleviate it.

    Property Investment


  5. Thanks for every other informative website. Where else could I am getting that type of information written in such an ideal method? I have a undertaking that I’m simply now running on, and I have been on the look out for such information.

    Success Accounting