The Indian stock market has had an impressive run over the past five years. Eaton Vance Greater India (ETGIX), for instance, posted a 46.3% annualized return over this period, turning a $5,000 investment into more than $33,500. Not too shabby.
The fund's top holdings include Tata Motors
But are the good times coming to an end for Indian stocks?
The Economist seemed to think so back in February. The Feb. 3 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, India's BSE Sensex index has been quite volatile -- at one point in July it was up 10%, then it was down 4% by August. Presently, the BSE is up 13% since the article ran, leaving the "hard landing" the article described as "inevitable" yet to occur.
What this means for you
Even if you don't believe what The Economist article said 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? 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 Sirius Satellite Radio
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 senior analyst Bill Mann recommended a Taiwanese company for Global Gains subscribers in January that is now up 60% since the pick was made. To see what it is, just 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 Fool contributor Todd Wenning hungry for some Tandoori chicken. He does not own shares in any company mentioned. Akamai is a Motley Fool Rule Breakers pick. Amazon.com is a Stock Advisor choice. The Fool's disclosure policy is never overheated.