India still trades at highest P/E ratio in the world

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: India is still trading at the highest P/E ratio in the world. It is also one of the most expensive market in the world on price-to-book value (PBV) basis. The Sensex PE is at 21x 2005 earnings and PBV is at the multiple of 4.5.

It was not so long ago that India was one of the cheapest markets in Asia. It is now among the most expensive after foreign institutional investors (FIIs) bought a net $10.2 billion of Indian stocks in 2005 and have continued to escalate their investments in the country. India showed an impressive performance in 2005 but, unlike Korea, India's valuations deteriorated. With a ROE of 22% and a PBV at 4.5x India is clearly the most expensive market in the Asian region.

"We remain very bullish on India's long-term story but we see very limited potential in the nearer term. Not only are valuation levels unjustifiably high, but much needed economic reforms have stalled," an equity dealer said.

However, despite concerns, market participants are betting on rush of liquidity by FIIs. In turn, FIIs are betting on India's long term growth story even after it has become most expensive market. India's GDP is where the US GDP was in 1964. On a per capita basis, India's GDP is comparable with the US level in the 1930s. In contrast, India's stock market trading volumes are where the US markets were trading in the early 1980s. Even more stark is the comparison of trading volumes to GDP; India is where the US was only 10 years ago.

Granted that globalisation should mean that some of this is tenable. Then again, India's stock market reforms are ahead of the economic reforms justifying the progress made by financial market volumes. But still, the magnitude of activity as a base can be fraught with of over- estimating the market's potential. Indian stock market activity may have to undergo a vicious correction or a protracted phase of low growth to allow the real economy to catch up.

"We expect the former outcome over the latter given India's emerging market status and the excesses of the recent liquidity cycle in the form of consumption and asset market bubbles," a foreign brokerage stated in its report.