Emerging Markets on a Tear: Avoid the Indian Stampede

There's no gainsaying the fact that emerging markets (except China) have been the leaders of the current bull-run that began taking wings in March 2009. Now while there are murmurs abound that valuations of these markets have reached their multi-year highs, the fact remains that emerging markets are showing better signs of growth after last year's crisis than what is seen in the developed world of the US and Europe. In fact, the improvement in the economies of Brazil, Russia, India and China (BRIC) has taken investors by surprise given that none had expected such a fast recovery. The fact that this recovery is largely based on cheap and excess liquidity ,that has the risks of building up into another bubble, is another point of discussion.

Data Source: Yahoo Finance Note: Country names represent their benchmark stockmarket indices

"If you're a BRICs investor, it's a little bit of a perfect storm," says an international fund manager to Bloomberg. He rightly adds, "China is basically leading the way out of a global recession. Russia and Brazil are tied into global demand. And India had a very positive election result in May that made people more optimistic."

Take for instance India. Since the run-up started in March, foreign institutional investors have alone pumped US$ 10 bn into stocks thereby helping the benchmark BSE-Sensex double from its lows. Stocks from the mid and small-cap spaces have risen even faster, outpacing gains in the large caps. While in any bull run,this phenomenon (mid and small caps outperforming large caps) might seem as a sign of danger, it does not seem so here. This is given the base (in terms of valuations) from which these mid and small caps have risen was extremely low after the crash that lasted until March. For instance, the BSE-Smallcap index was then (March 9th) trading at just around 5.9 times.

Data Source: Yahoo Finance

Now, at the current levels, while the large caps represented by BSE-Sensex are trading at an average P/E valuation of 21 times their trailing 12-months earnings, the mid and small-caps represented by BSE-Midcap and BSE-Smallcap indices are trading at 18.1 times and 16.7 times respectively. These aren't any attractive levels to enter these stocks.

Coming back to emerging markets in general, Bloomberg estimates that the MSCI Emerging Markets Index is now trading at 20 times reported earnings for the first time since mid 2000. It also reports that foreign investors are now concerned that valuations are stretched. At this point, one group of investors believes that the economic recovery is coming through, while another group like Warren Buffett, Bill Gross of PIMCO and other hedge fund managers believe that growth rates will be lower once the massive dose of liquidity eases.

As mentioned above, FIIs came back to India in droves in March, when the rally began (or in fact, causing the rally). Any shift in stance could easily reverse the gains. We advise investors to exercise caution in buying stocks, especially ones that are worthless, lest they get caught in the stampede.

Comments

[chap08:]

"We advise investors to exercise caution in buying stocks, especially ones that are worthless"

Sounds like good advice to me.

Sep 19 10:50 AM

[punk_ash:]

there are ponzi schemes all over the world and India is no exception.

Oct 04 12:09 AM