The Indian stock market has had an impressive run over the past five years. Eaton Vance Greater India (ETGIX), for instance, posted a 41.2% annualized return over this period, turning a $5,000 investment into more than $28,000. Not too shabby.
Top holdings of the fund include Infosys Technologies
But 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." Moreover, inflation has fluctuated between 4% and 6% over the past 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 have witnessed tremendous upward pressure.
OK, but economic statistics aren't always good predictors of the stock market, right? The Economist issued a warning in February 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."
Since The Economist article ran on Feb. 3, India's BSE Sensex index has been quite volatile -- at one point in July it was up 10%, but it has since given up those gains and presently sits slightly lower than its close on Feb. 2. Despite the recent dip, the "hard landing" the article described as "inevitable" has not yet occurred.
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 Trust
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.
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This article was originally published on Feb. 20, 2007. It has been updated.