Indian stocks beat Dow in valuations

Sensex P/E at 18.9 versus Dow's 18.5.

Indian stocks are becoming dearer than their global peers. A couple of weeks ago, the price-earnings ratio of the Bombay Stock Exchange's Sensex surpassed that of the US equity benchmark index Dow Jones Industrial Average.

Currently, the 30-share Dow, the oldest equity index, trades at 18.5 times its historic annual earnings, while the Sensex trades at 18.9 times trailing 12-month earnings. Since the beginning of this year, the diversified stock index Dow has delivered a return of 3.35 per cent, while the Sensex has recorded gains of 14.96 per cent.

In absolute terms, the Sensex is just about 300 points short of the Dow, which is more than a century old.

Analysts have been talking about high valuations of Indian stocks for nearly a year now, but the markets have been scaling new highs on the back of strong fund inflows.

Over the past one year, the Dow has hardly moved, posting a return of merely 2.8 per cent, but the Indian market has gained a stupendous 57.83 per cent. Even in the past three years, the Indian market gave more than five times the returns delivered by the Dow.

Since March 13, 2003, the US benchmark index has appreciated 41.61 per cent, while the Sensex has gained 247.58 per cent.

During this period, the US markets have got de-rated continuously, while the Indian markets, along with several other emerging markets, have been re-rated.Some analysts maintain that stock markets in India still may not be more expensive than developed markets given the pace of earnings growth.

Corporate earnings are likely to grow by 15 per cent in the coming fiscal, while earnings growth in the US is estimated to be around 8 per cent, which implies that based on forward earnings India trades at a lower earnings multiple.

Traditionally, despite higher growth rates, emerging markets have not got higher valuations than developed markets as they scored less on several other parameters like macro imbalances, corporate governance issues, inefficient resource allocations, weak banking systems and so on.

However, now America is seen as failing on all these counts, especially given the huge trade deficit and corporate governance issues.

Malcolm Wood, Asia Pacific Strategist, Morgan Staley, said, "If investors do question the wisdom of paying a higher price for lower growth rate combined with the issues which are anyway a part and parcel of every market in the world today, we could see further rise in emerging market equities and higher valuations in emerging markets may be sustained."