India’s Sensex closed at 20,032 on Friday.This is not far from the all-time high of 20.873 reached in January 2008. During the credit crisis, the index reached a low of 8.160. In just over 18 months the index has rebounded sharply gaining over 150%.
This dramatic rise is mostly based on the assumption that the economy will grow at over 8% consistently. However, there are many external and internal factors that may put this growth rate into jeopardy. As the hot money continues to flow into the Indian markets, I believe investors need to cautious as the risks for downward movement are higher than the rewards for further rise from current levels.
Sensex Performance - 5 Years:
The following are some of the reasons investors may want to consider before jumping into the Indian markets:
- Indian equities have become very expensive compared to other emerging markets. For example, the PE of the Nifty index is about 25. India trades at a PE of 23.9 while Brazil and China have P/Es of 12.5 and 14.2 respectively based on Financial Times market data.
- Foreign investors are pouring money into the markets. They pulled out $14.84 billion during 2008 which led to the crash of the Sensex. But thru September of this year they have plowed back over $15.62B in the markets. Foreign portfolio investment which is highly short-term focused reached over $32.0B in 2009-10 period .
- Relatively speaking only a few shares of the major companies that are active are available for trading. Hence, large amounts of capital chasing a few free-float shares in select companies leads to huge rise in stock prices.
- Inflation runs at double digits and may rise further if policy makers do not increase interest rates. Inflation remains stubbornly high primarily due to food prices.
- Some global commodity
