With the PE ratio up three times since November last year, valuations are far from cheap.
“Valuations are not as cheap as they used to be; a 20 to 30 per cent correction won’t be unusual,” Faber, publisher of the Gloom, Boom & Doom Report, said in a press conference in Mumbai. “The markets don’t keep going up in a straight line.” He didn’t specify a time frame for the decline.
Indian stocks rose after the re-election of Prime Minister Manmohan Singh’s ruling coalition in May and as the economy expanded at the fastest pace in one and half years in the three months ended September. The Bombay Stock Exchange’s Sensitive Index is valued at 22.6 times earnings, a threefold increase from 8.1 times in November 2008, data compiled by Bloomberg show.
India’s benchmark stock index fell, completing its steepest weekly slide. The Sensex, retreated 174.42, or 1 per cent, to 16,719.83. The gauge has fallen 2.3 per cent this week, its biggest such loss since the five days ended November 29. The S&P CNX Nifty Index on the National Stock Exchange dropped 1.1 per cent to 4,987.70. The BSE 200 Index fell 0.8 per cent to 2,097.18.
“Investors are cautious about valuations and are not going overboard,” said Swati Kulkarni, a Mumbai-based fund manager with UTI Asset Management Co., who manages the equivalent of about $850 million of equities.
The central bank may tighten monetary policy to help contain a spillover from food-price inflation after gauging prices in December, Chakravarthy Rangarajan, economic adviser to the prime minister, said on December 15. The Reserve Bank of India is scheduled to review interest rates on January 29, 2010.
Faber said he remains upbeat about the long-term potential for India as consumption rises in the world’s second-most populous nation. Banks, infrastructure and mining stocks are among industries he favours, he said.
“Even if interest rates go up somewhat, it won’t be disastrous for Indian stocks,” he said. “In the long-term, it remains very attractive because of the domestic consumption play.”
The authors are Bloomberg News columnists. The opinions expressed are their own
