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Is India Over-Valued?

|Includes: INFY, TTM, Wipro Limited (WIT)
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Yes!  India’s stock market is now one of the most expensive in the world – with a P/E (price/earnings) ratio of 25. At 25 times earnings, India’s P/E ratio takes account of t

he opportunities available in that market, but not the risks.  The broader emerging markets universe trade a at P/E of 11.6 times earnings.  Avoid India for now.

Obama’s recent visit has put the spotlight on India.  India’s big festival of light, Diwali, which runs from Nov 5-9, marks the start of the Hindu new year and is considered the most auspicious time to start investments. India’s stocks have recently climbed to a record highs.  The mood is very positive in India.

India’s 20+% rally this year makes its Sensex index the best performer among the worlds 10 biggest stock markets.  India’s superstars include Tata Motors (NYSE:TTM), the best performer this year; Coal India, the world’s #1 producer of coal; and Bharti Airtel, the worlds 3rd largest in-country mobile operator, behind China Mobile and China Unicom – which also ranked #3 among the world’s top 10 tech & telecoms companies based on ‘total shareholder return’, just behind global heavyweights like Apple and Google.  India is also home to a host of world-class IT outsourcing powerhouses, like Satyam (SAY-WD), Wipro (NYSE:WIT) & Infosys (NASDAQ:INFY).

But India’s index has also become the most expensive in Asia and among the BRIC markets that also include Brazil, Russia and China.  India’s stock market is now one of the most expensive in the world – with a P/E ratio (price-to-earnings) of 25.  India’s government can’t stop spending money and, even with economic growth of more than 8%, the budget deficit is around 10% of GDP.  Add that to a chronic double-digit inflation rate and you have a country that’s in danger of experiencing a credit crunch.

Most investors don’t grasp that low P/E stocks return the most over time, not high P/E stocks.  This is really no different to being a contrarian investor and buying stocks that are out of favor over stocks that are considered ‘hot’ by the masses.

So what does this mean for investors thinking of investing in India today?  One word:  CAUTION!  The only global markets trading on a higher P/E than India right now are: Sri Lanka (31.2 P/E), New Zealand (25.3 P/E) and Denmark (27.2 P/E).

This doesn’t mean India doesn’t have great growth potential.  It does.  But stock market profits are made “in the buying.”  Meaning that the price you pay for growth is as important…if not more important…than the price you sell for.

Conclusion:  Avoid India for now.  Value minded profit hunters may want to consider Turkey (10.7 P/E), Brazil (12.6 P/E), China (15 P/E) or Russia (9.5 P/E) and leave the hype to Obama.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.