Indians see 'bull,' not bubble, for stock market

The story from India's answer to Wall Street has not changed for months now. Every day, it seems, brings a new record high for India's stock exchange.

Three years ago, the Bombay Stock Exchange's Sensitive Index, or Sensex, topped the 6,000 mark for the first time since its founding in 1979. Tuesday, it stood at 14,211, 96 points off its record high. It has added more than 4,000 points in the past year alone.

Long passed over as being too volatile, Sensex is now among the most sought-after emerging market indices, as investors abroad pour money into companies whose profits are increasing by one-third every year. In the past five years alone, foreign ownership of the market has more than tripled to 20 percent.

Yet, like America in the 1990s, when the Internet seemed to have created a "new economy" freed from the gravity of boom-and-bust cycles, there is a question of how long this can continue – and whether the frenzy is creating a bubble.

Given the Indian market's feast-or-famine history, it is an important question for investors from Mumbai (Bombay) to Memphis.

"There is an amount of exuberance in the system," says Jay Sinha of Ambit Capital in Mumbai. But perhaps not the "irrational exuberance" that Alan Greenspan famously observed in the 1990s boom, Mr. Sinha says. Though many experts agree that Indian companies are somewhat overvalued, the core of the market's growth is founded on solid economic footing, they add.

After all, Sensex investors are dipping into concrete manufacturers and construction companies – not Internet startups with beanbag chairs and catchy names. Challenges of politics and infrastructure remain, which could still slow the market's upward march. But the Indian economy has clearly changed gears, analysts say, giving investors reason for their continued optimism.

"In the overall economic environment, it seems that not only is growth high, but it is sustainable," Sinha says.

The tremendous growth can also be seen in enormous corporate profits, which are increasing by 35 percent a year in many cases. With markets in Western nations largely stagnant, foreign investors have been increasingly willing to look abroad to beat their projections, and India's profit rates have proved too tempting to ignore.

"Within the emerging markets, India is one of the highest growth markets," says Anup Maheshwari of DSP Merrill Lynch Fund Managers in Mumbai.

By Sinha's statistics, it has provided a 22 percent return on investment, the highest of any emerging market. This has fed on itself, with investors driving stock prices up in hopes of gorging on Indian companies' substantial profits. The result, say experts, is that many Indian companies are probably overvalued.

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