[via Atanu] Jeremy Siegel writes:
As I explain in my book, The Future for Investors, there are two aspects to every investor decision. First you must size up the prospects for the firm, the sector, or the country. On this score, India scores some high marks.
But you must also evaluate the price that you are paying for these prospects. India’s investment climate looks ripe for growth, but the markets have recognized this and have pushed stock prices upward. The Sensex 30, India’s best-known stock market index and analogous to our Dow-Jones Industrial Index, was only 3300 in December 2002 but on February 6, 2006, the index broke through 10,000 for the first time.
The price-to-earnings ratio on this index has reached 21, while Chinese stocks on the Hong Kong Stock Exchange are selling for only 15 times earnings. Goldman Sachs Asia Pacific Strategy recently indicated that it thinks valuation has turned the tide toward China. In a December review of the Asian markets Goldman stated, “We remain bullish long term [on India], but are market weight given the stretched valuations [and other factors].” In contrast Goldman’s Asia team remains overweight in Chinese equities due to the cheaper valuations.
Both India and China have enormous promise and I would certainly own stocks from each of these countries in a long-run portfolio. But India’s edge is no secret and future returns will not match the stellar gains of the last three years. And remember, all the developing markets, no matter how promising, contain considerable risk.