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Everyone nowadays is gung-ho about emerging markets. And why not? Emerging markets are currently the world's fastest growing economies. Hence, it is of not much surprise that more and more money has been finding its way into these markets. The largest markets for FII inflows are India and China. India for one has been a recipient of huge inflows owing to the fact that the Indian economy is one of the fastest growing economies of the world clocking a 9.3% GDP growth rate in 2006-2007. This growth has been witnessed since 1991, when the Indian Government decided to liberalize the economy.

The closing figure for the benchmark Sensex on October 16, 2007 was 19, 051. The mountainous rise from 18,000 to 19,000 took as little as 4 days to surmount. The corresponding figure for the Sensex barely 2 years ago in 1995 was around 6000. The year to date net FII inflows as on October 16, 2007 is around $9.5 billion. Out of this $7.2 billion have been invested in the month of September alone.

It has been an interesting climb all this way. What is intriguing is the fact that the rise has been predominantly continuous, whereas western markets have been staggering. The rise was initially pretty much broad based across market capitalizations. However, presently, there have been some companies leading the pack, while there are a number of companies that are yet to touch the all time highs created before the carnage of May 22, 2006 when the market had corrected 1100 points. Across sectors it has also been quite broad based barring a few sectors, such as Auto, IT and pharma that have been reeling under the pressure of the beleaguering dollar vis-à-vis the rising rupee.

Historically such periods of exuberance have been followed by what is called a "Graveyard market", where investors who invest at higher levels get entrapped and others refrain from investments. With the market at hereto unseen levels, it prompts us to question, is this rally going to continue? And for how long? After all, witnessing the Sensex reaching new highs everyday in the absence of significant triggers seems unjustifiable. It is currently trading at a 12 month multiple of around 25 times earnings. On comparison with the accepted level of around 20 times earnings, it does seem overvalued. However, on examining trends from other emerging markets such as the Chinese Markets that currently trade at a 12 month multiple of 50 times earning, the Sensex may not seem all that expensive.

At the same time, both India and China seem insulated from the weakness exhibited in the west. The Sensex continues to march ahead flaunting buoyancy and ignoring Global cues signaling weakness from the sub prime crisis and the declining dollar. With research agencies such as CLSA predicting long term levels such as 40000 for the Sensex, it seems like a wise choice not to stay as a spectator on the periphery but join the race whilst the bulls have their way.

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Article by Chandni Kripalani | Subscribe via RSS | Join Club22 Free

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