The Indian stock market has had an impressive run over the past five years. Eaton Vance Greater India (ETGIX), for instance, posted a greater-than 40% annualized return over this period, turning a $5,000 investment into more than $27,000. Not too shabby.
Top holdings of the fund include Infosys Technologies and Satyam Computer, both of which are up 40% or more over the past year.
So, are the good times coming to an end for Indian stocks?
The Economist sure seems to think so. A February 2007 article noted that from an economic standpoint, India's "prices are rising fast, factories are at full capacity, [and] loans are piling up." Furthermore, Indian inflation sits at 6% to 7% per year and "99% of Indian firms report that they are operating above their optimal capacity." In other words, supply can't keep up with demand, and domestic prices are skyrocketing.
OK, but economic statistics aren't always good predictors of the stock market, right? The Economist issues a warning about Indian stocks as well: "If you're looking for a stock market bubble, Indian share prices have risen more than four-fold over the past four years, far more than in China. If something is not done, then a hard landing will become inevitable."
Needless to say, The Economist's editors won't be buying shares of the Eaton Vance fund anytime soon.
What this means for you
Even if you don't believe what the Economist article says about India, it might be a good time to look closely at any Indian stocks you own, just to make sure they're reasonably valued.
Why should you do that? For one, The Economist was pretty much spot-on when the 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 fall short of 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 Qualcomm
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.
That said, 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 senior analyst Bill Mann recommended a Taiwanese company for Global Gains subscribers in the January issue, and our Global Gains team is traveling to Taiwan, India, and China to meet with some promising companies in those countries and determine which will make for the best investments. If you'd like to receive all of their updates, research, and specific recommendations, follow this link for a free 30-day full-access trial to the Global Gains service.
This article was originally published on Feb. 20, 2007. It has been updated.
All of this talk about India made Todd Wenning hungry for some Tandoori chicken. He does not own shares in any company mentioned. Yahoo! is a Motley Fool Stock Advisor choice. Vertex Pharmaceuticals is a Rule Breakers pick. The Fool's disclosure policy is never overheated.