The Indian stock market has had an impressive run over the past five years. Eaton Vance Greater India (ETGIX), for instance, posted more than a 42% annualized return over this period, turning a $5,000 investment into about $30,000. Not too shabby.
Holdings of the fund include ICICI Bank (NYSE: IBN ) and the recently introduced American depositary receipt Sterlite Industries (NYSE: SLT ) . ICICI Bank is up 37% over the past year, while Sterlite is up 38% since it hit the U.S. markets in late June.
But are the good times coming to an end for Indian stocks?
The Economist seemed to think so last February, when it published an article noting that from an economic standpoint, India's "prices are rising fast, factories are at full capacity, [and] loans are piling up."
Those facts caused the publication to issue a warning: "If you're looking for a stock market bubble, Indian share prices have risen more than fourfold over the past four years, far more than in China. If something is not done, then a hard landing will become inevitable."
Since The Economist's article ran, India's BSE Sensex index has been quite volatile -- at one point in July it was up 10%, then it dropped 8% in one week in October. And despite the recent 12% drop since Dec. 13, the BSE is still up nearly 23% since last February, meaning the "hard landing" the article described as "inevitable" is yet to occur.
On the other hand, a lot of positive changes have occurred in India since last February. For instance, over the past year, Indian inflation has somewhat come under control, recently hitting 3.93% -- down from 6.69% in January 2007. In October, the Securities Exchange Board of India took measures to improve its management of capital inflow. Moreover, a September OECD report stated that the Indian government's GDP growth target of 10% in 2011 is achievable if market-based reforms continue.
What this means for you
Even if you don't believe what The Economist's article said about India, it might still be a good time to look closely at any Indian stocks you own, just to make sure they're reasonably valued.
Why? For one thing, The Economist was pretty much spot-on when its April 13, 2000, issue called the growth projections of the American economy "rosy" and said if actual growth fell short, it might be "brutal" for Wall Street. As we all know, economic growth did, indeed, miss expectations, and investors were punished harshly -- especially in the "New Economy" sector of technology.
In 2001 alone, many of the overheated U.S. tech darlings came crashing down. The Nasdaq 100 dropped 31%, along with names such as Comcast (Nasdaq: CMCSA ) , Xilinx (Nasdaq: XLNX ) , and Flextronics (Nasdaq: FLEX ) .
Avoid the hype
The Indian stock market could very well keep growing for years to come, as the government and corporations build better infrastructures to support the rapidly growing economy.
But if you're thinking about putting more money into international stocks in the near future, it may be prudent to look in undervalued markets. And, yes, there are still some out there.
Taiwan, for instance, is one market that our Motley Fool Global Gains team has earmarked as generally undervalued. In fact, Fool advisor Bill Mann recommended a strong Taiwanese company for Global Gains subscribers in January 2007. To see what it is, just follow this link for a free 30-day full-access trial to the service.
This article was originally published on Feb. 20, 2007. It has been updated.
All of this talk about India has made Fool contributor Todd Wenning hungry for some Tandoori chicken. He does not own shares in any company mentioned. Sterlite Industries is a Global Gains recommendation. The Fool's disclosure policy is never overheated.