Theres a bubble in making that may cause markets to crash

Written by Taneesha Kulshrestha | New Delhi, Jan 14 | Updated: Jan 15 2008, 05:11am hrs
Here is some good news and bad ones as well for stock market watchers. The good news first: Professor Bruce Greenwald, leading economist and professor of finance and asset management at the Columbia Business School, New York, expects the Indian stock market valuations to almost double in the near future. I would not rule out the Indian stock market hitting the 50 PE (price to earning) mark in near future, he says. Professor Greenwald is an authority on value investing, productivity and the economics of information. He is also known as the guru to Wall Street gurus and is the author of Value Investing: From Graham to Buffett and Beyond and Competition Demystified: A Radically Simplified Approach to Business Strategy, with Judd Kahn (Putnam Penguin, 2005).

Now the bad news. Greenwald also warns that there is a bubble in the making that may cause the stock markets to crash. This will happen as the current returns at 9-10% stop matching the 25-30% return expectations that investors are looking for, he says. He warns that investors should be prepared for the same. Currently, the Indian stock markets trades at a PE multiple of around 25.

This is the professors first visit to India and his agenda is to forewarn Indian companies about the future of globalisation and what will it take to sustain competitive advantage in such a scenario. He has a somewhat startling comment to make on the same. Globalisation will weaken going forward, he says.

He bases his argument on the fact that while differentiated manufacturing goods could be traded with ease, trading differentiated services will be difficult as some services can only be consumed and produced in the local market itself. Also those services that can be standardised for outsourcing may well be automated as new technologies make it easier to do so. This phenomenon has already been witnessed in the United States where more jobs have been lost due to technological innovation rather than outsourcing, he says.