The stock market is seen as a barometer of economic development in a country. The vibrancy of the stock market has a high degree of correlation with the level of economic development in a country. The relative importance of the banking system vis-a-vis the capital markets decreases as a country develops economically. Among the many possible ways to measure the robustness of a country’s stock market, two widely used measures are aggregate market capitalisation (outstanding number of shares times their price aggregated over all companies listed on exchanges in the country) and the liquidity in the market (value of stocks traded over a period of time). Market capitalisation captures the level of economic value added by companies while liquidity measures the ease with which stocks can be traded on an exchange. A high degree of liquidity translates into lower transaction costs for investors, which in turn increases the attractiveness of stocks and hence a company’s ability to raise money in the market.
In this note, we combine both these measures (market cap & liquidity) into a single measure, called the stock market turnover to see how India stacks up versus US, Japan and China. The data is sourced from the World Bank and the turnover is calculated as follows:
Turnover = (monthly value of stocks traded) / (month-end aggregate market capitalisation) * 12
The following charts highlight the stock market turnover for India versus USA, Japan & China. A few points are immediately visible –
- India’s market turnover is way below that of these developed countries.
- India’s turnover declined from 100% in 2004 to about 58% as of 2018. In plain terms, this means the entire market capitalisation was traded at least once in 2004 while only 58% of the market cap was traded in 2018.
- During a financial market crisis, the turnover shoots up. For example, in 2008, the market turnover in India increased to about 150%. This is evident across other countries as well. In a crisis, investors rush to sell their holdings and hence the stock turnover shoots up.
- The market turnover in the US is just over 100% while that in Japan and China are 150% & 200% respectively. So the entire market cap in china is turned over twice in a year. This is symptomatic of highly liquid markets which could be a result of shorter holding periods amongst investors, more arbitrage activity and greater degree of participation by ETFs and algorithmic funds in those markets.
- Specific to India, the low turnover may be due to a number of ‘zombie’ companies that are never traded on the exchanges. This is especially true of a number of companies listed on the BSE.
- While India has come a long way in terms of developing its stock markets, there is a long road yet to be covered.