The broken relationship between market capitalization and GDP

The MacBook Pro is the only one Apple Product made in the USA. Currently, total Mac sales account for less than 10% of Apple’s revenue, and the MacBook Pro accounts for just over half of Mac sales.

More than 60% of Apple’s revenue comes from outside the US. While Apple’s ecosystem has generated millions of jobs around the world, Apple employs fewer than 200,000 people in the US.

In short, Apple’s growth has not generated large-scale employment or significant growth boosts. GDP In the United States, it is not just the American economy that is responsible. The biggest beneficiary of job creation has been China, where the Apple ecosystem has created more than 4 million jobs.

Its Indian operations are expected to create 600,000 jobs by the end of the year. Better economic growth in India and China helped Apple’s growth by creating demand. But the world’s largest company by market capitalization is adding points to the Nasdaq and the U.S. market capitalization!
In light of these changes in the global economic landscape, it is worth asking why we continue to rely on home country GDP growth as a predictor of stock market direction and valuations. Traditional methods may no longer be as reliable in today’s rapidly evolving and interconnected world.

The ever-reliable Buffett indicator is flashing red in the US. The market capitalisation-to-GDP ratio has hit an all-time high of 2x, significantly surpassing the 1.4x ratio seen just before the 2008 global financial crisis and the dot-com bubble of 2000. India is also in the high zone with a ratio of 1.3x, the highest in over a decade, but still lower than the 1.7x recorded in 2008 and the 2.2x peak in 1992. In a recent article (Superstars for too long: Time to move away from India and US equity markets), Akash Prakash of Amansa Capital pondered whether these two darlings of global equity markets (the US and India, with 20-year US dollar-denominated yields of 12.8% and 10% respectively) are about to peak. One of the most acclaimed thinkers of our time, Ruchir Sharma, predicts that America’s golden age may be over. In his article “The World Should Take Note: The Rest Is Growing Again,” he forecasts that emerging markets, with their better growth, stronger balance sheets, and prudent fiscal governance, are poised to outperform the rest, reversing the past four decades of American dominance in equities (U.S. stock market capitalization is now two-thirds of the world’s).

However, I would question both conclusions. As the Apple example shows, the growth of corporate profits and market capitalization is moving away from the economic fundamentals of the home country. This trend is evident in many economies.

There are three reasons for this breakdown of the link: global production, global markets and capital allocation.

Global Manufacturing: Electronics manufacturing benefits the Indian job market and, consequently, the Indian economy. By fiscal year 2025, India’s electronics exports are estimated to reach $25 billion, nearly five times the amount from a decade ago. Additionally, $14 billion worth of iPhones are currently assembled in India.

According to government reports, approximately 2.5 million people are employed in electronics manufacturing in India, and the goal is to double that number within five years. In comparison, China and Taiwan have significantly higher employment figures in this sector. Therefore, Apple’s increased investments and growth do not substantially benefit the US economy.

While most of Apple’s suppliers operate on profit margins below 5%, Apple’s margins exceed 30%, allowing them to capture the majority of value (market cap) in the US. In addition, 68% of US companies outsource at least some of their production globally. This approach has benefited global GDP and US market cap over the past 2-3 decades.
Global Markets: According to Bloomberg, 40% of S&P 500 companies’ revenue now comes from the rest of the world (ROW, excluding the US).

This figure was 30% a decade ago and probably less than 20% two decades ago. For large technology companies, the ROW percentage is even higher, at around 60%. The largest luxury goods manufacturer, LVMH, generates more than 40% of its revenue outside Europe and the US. Strong growth in China has benefited LVMH more than Chinese companies. Over the past 20 years, LVMH shares have generated annual US dollar-denominated returns of 15%, outperforming both the Nifty and the S&P 500. It is also the second largest company by market capitalization in Europe.

Capital Allocation: This is my favourite point and the most relevant to India. There is a clear positive correlation between capital allocation and market capitalisation; however, there is also a negative correlation between capital allocation and GDP growth of a country.

Indian companies have increasingly focused on market capitalisation and shareholder returns, demonstrating superior discipline in capital allocation. In contrast, Chinese companies have historically prioritised scale over capital returns. Similarly, Korean and Taiwanese companies have also sought scale in the past.

These countries created larger scale companies, which created jobs and boosted GDP growth. While the share prices of Indian companies performed better, their measured expansion had a smaller impact on job creation, ecosystem linkages and export potential, giving the country lower leverage to GDP. Consequently, better capital allocation leads to lower GDP but higher market capitalization.

Is there, then, a trade-off between faster GDP growth and the market capitalisation or valuation of a country’s stock markets? The China+1 opportunity has been significant since the global financial crisis and has been accelerated by the new “Cold War”. However, countries such as Vietnam, Bangladesh and Indonesia have been more successful in increasing their share of the China+1 market. Whether measured and steady growth with a higher allocation of capital is more beneficial in the long term is a topic for another debate.

I want to add a fourth dimension to the market capitalization argument: innovation and brand building. Both create competitive advantages and pricing power. The US is a leader in innovation, and with the growing startup culture in India, we are starting to make strides in this area as well. Korea and China have successfully established global brands, such as Xiaomi, BYD, TikTok, and Samsung.

While India has developed many strong local brands, we are yet to make a significant global impact. Foreign brands are still often perceived as superior in India. To maintain the valuation premium for Indian stocks (the MSCI India index trades at a 78% premium to the MSCI EM index), addressing brand stagnation in the long term will be crucial.