Nigeria’s stock market saw a U-turn on Buffer Indicator as market capitalisation to Gross Domestic Product fell in 2018, after the ratio seemed to be improving from a steady decline in the 3 years to 2017.
The Market Capitalisation to Gross Domestic Product is a measure of the total value of all publicly traded stock in a country divided by its Gross Domestic Product (GDP).
The metric was popularised by Warren Buffet, chairman and CEO of Berkshire Hathaway, and is a broad way of assessing whether a Stock market is overvalued or undervalued, compared to a historical average. It is a form of Price/Sales valuation multiple for an entire country.
Generally speaking, where the valuation ratio ranges between 50 and 75 percent, the market can be said to be modestly undervalued, and fairly valued if the ratio falls between 75 and 90 percent. A market is also said to be modestly overvalued if it falls within the range of 90 and 115 percent.
The ratio for Nigeria fell to 7.93 percent in 2008, from 9.9 percent in the year before. Nigeria’s stock market shed some 18 percent in 2018 as investors turned to less risky developed market assets following a tight financial condition across most of Europe and America and domestic political risk intensified.
On the other hand, the domestic economy saw an uptick of 1.9 percent last year.
Since the ratio rose to 15.65 percent in 2013, the stock market has represented a decreasing percentage of Nigeria’s economy until a 2.54 percent point increase in 2017 held signs of a rebound. In 2017, the domestic equity market gained about 42 percent.
On average Nigeria has a market capitalisation to GDP ratio of 11 percent, while emerging market peers like China has 56.4 percent, Brazil 47.5 percent, India 74.15 percent and Egypt 26.26 percent.
While the Market Capitalisation to Gross Domestic Product provides a good gauge for a stock market valuation, analysts say among other things, shortcomings include mismatching flow and stock variables and ignoring the trends in companies’ revenue and profit.