For the past few days, western media has been bombarding the issue of Indian stocks being over valued. They sometimes even go as far as suggesting that the emerging nations are just as poor at they were back in the day when the term BRIC was coined by Jim O'Neill of Goldman Sachs. Its hard to understand the logic of such suggestions by he large media houses. The very suggestion that India is exactly at the same level of poverty as it was earlier in the decade could not be much farther from the truth. From the skyline of large metropolitan cities of India to the tech-savy villagers who are now connected to the world of commodities' trading speaks volumes about the development in India.
India's growth unlike some other parts of the world is to a greater degree organic. Therefore, its not artificial growth. For example, China's growth in 2009 was to a large extent artificial because most of the cash in the economy was injected by the government of China to keep the otherwise dead economy in the region going. In other words China had opened the gates of government spending to inflate its year end GDP growth number. However, India's growth was mostly because of growth in India's private sectors. Indian based firms are now being welcomed by governments of other nations to set up shops in their respective countries in the hope of decreasing unemployment in their respective nations. For example, several USA state governments are trying to bag Indian firms to set up offices in USA in the hopes of creating jobs in those states.
As for the poverty in India, one can look at the figures from Statistics Board in India and see that literacy has cumulatively gone up, average income has gone up, human rights awareness has gone up, infrastructure has certainly increased and capital markets in India are the most mature in all of Asia - BSE is Asia's oldest stock exchange. However, there are still many fund managers who believe that there is not much past information on BSE's indices, because they themselves have not done their own research and for the most part are only following a bias opinion.
On average there are improvements which are mostly centric to the large cities of India, one must not forget that there is a trickle down effect which can be seen in teir-2 and tier-3 cities all the way down to the small villages (as indicated above) of India where farmers communicate using their Blackberrys.
Now lets look at the valuation debate. One article suggested that Tata Motors was trading at a P/E of 27 whereas China's largest automobile producer is only at P/E of 23. It further went on to say that Mumbai's SENSEX was valued at 20x, Shanghai Composite Index was valued at 18x and S&P 500 of US at 14x. And the article suggested that because SENSEX is valued at much higher multiple, that it is a "bad thing". One must remind these so called "financial reporters" as to why investors even use the P/E ratio. The P/E ratio tells the relationship of a stock price to the earnings per stock for that specific company. P/E of one company would be higher than other only if investors forsee an increase in earnings of that specific stock in comparison to its peers. With this reasoning, if SENSEX has a higher multiple than S&P 500 of US, then that would logically mean that investors forsee India's 30-stock index to do better than America's top 500 companies' index.
(Whenever one reads articles published in a commericial magazine or newspaper, its imperative to read between the lines - that should be the Thought of the Day!)
India's growth unlike some other parts of the world is to a greater degree organic. Therefore, its not artificial growth. For example, China's growth in 2009 was to a large extent artificial because most of the cash in the economy was injected by the government of China to keep the otherwise dead economy in the region going. In other words China had opened the gates of government spending to inflate its year end GDP growth number. However, India's growth was mostly because of growth in India's private sectors. Indian based firms are now being welcomed by governments of other nations to set up shops in their respective countries in the hope of decreasing unemployment in their respective nations. For example, several USA state governments are trying to bag Indian firms to set up offices in USA in the hopes of creating jobs in those states.
As for the poverty in India, one can look at the figures from Statistics Board in India and see that literacy has cumulatively gone up, average income has gone up, human rights awareness has gone up, infrastructure has certainly increased and capital markets in India are the most mature in all of Asia - BSE is Asia's oldest stock exchange. However, there are still many fund managers who believe that there is not much past information on BSE's indices, because they themselves have not done their own research and for the most part are only following a bias opinion.
On average there are improvements which are mostly centric to the large cities of India, one must not forget that there is a trickle down effect which can be seen in teir-2 and tier-3 cities all the way down to the small villages (as indicated above) of India where farmers communicate using their Blackberrys.
Now lets look at the valuation debate. One article suggested that Tata Motors was trading at a P/E of 27 whereas China's largest automobile producer is only at P/E of 23. It further went on to say that Mumbai's SENSEX was valued at 20x, Shanghai Composite Index was valued at 18x and S&P 500 of US at 14x. And the article suggested that because SENSEX is valued at much higher multiple, that it is a "bad thing". One must remind these so called "financial reporters" as to why investors even use the P/E ratio. The P/E ratio tells the relationship of a stock price to the earnings per stock for that specific company. P/E of one company would be higher than other only if investors forsee an increase in earnings of that specific stock in comparison to its peers. With this reasoning, if SENSEX has a higher multiple than S&P 500 of US, then that would logically mean that investors forsee India's 30-stock index to do better than America's top 500 companies' index.
(Whenever one reads articles published in a commericial magazine or newspaper, its imperative to read between the lines - that should be the Thought of the Day!)
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