High valuations seem to be taking a toll on the Indian market.

The Indian market has been one of the worst performers this year, with the Morgan Stanley Capital International (MSCI) India index down 15.9% year to date as on 21 February, while the MSCI Emerging Markets index is down just 7.3%. Moreover, most emerging markets have seen a smart bounce this month, with the result that the MSCI Emerging Markets index is up 6.1% (as on 21 February) compared with a decline of 1.8% in the index for India in February. In fact, India is one of the very few emerging markets that is not in positive territory this month.

What could be the reason? A recent research note from Goldman Sachs Group Inc. says that the Indian market's valuation is still too high and it trades at a 50% premium to the region on the basis of forward price-earnings (PE) multiple.

More significantly, Goldman Sachs believes that "India's pricing implies an expectation of 18% EPS (earnings per share) compound annual growth compared with mid-single digits for most other markets and 13% for China." Interestingly, current consensus estimates are for a re-acceleration of earnings growth of above 20% in fiscal 2010.

The consensus price-earnings multiple for MSCI India is around 19, which makes it important that growth continues to be high. Except for utilities and materials, most other sectors still assume growth higher than their PE multiples. Jeff Hochman, director of Technical Research at Fidelity International, London, has in a recent note argued that India's PE to growth ratio is at 1.39, the same as the world average.

China's is 1.03, Japan's 1.79, but the most overvalued market is the US, which has a PE to growth ratio of 5.12, according to Hochman. Data such as this was behind the now-unloved view that money would flee the distressed credit markets of the West for emerging Asia's more salubrious climes.

Independent research outfit BCA Research Inc. says "there is a mountain of US investable cash sitting on the sidelines, earning an everdwindling rate of interest." When and where will this cash get deployed? While it's unlikely that the markets will go up before light is seen at the end of the credit market tunnel, the cash mountain will ensure that risky assets go up very sharply once the fear ends.

Recommended Readings:

• Record U.S. Cash Reserves: Waiting To Be Deployed, But When? - BCA Research
• Technical Analysis in the Investment Process - Jeff Hochman (Fidelity)
• India: Off with the froth; stay underweight - Goldman Sachs Portfolio Strategy

• Is bear cartel keeping market on the edge?

  With the Budget less than a week away, there is no dearth of conspiracy theories. One such theory is that a group of powerful investors, which includes some hard-nosed foreign institutional investors, is trying to keep the market subdued so that there is no adverse proposal in the Budget as far as the stock market is concerned.

  This could also probably set the base for a strong rally even if the Budget is largely capital market neutral. The cartel in picture was said to be dumping heavyweight banking stocks and infrastructure stocks on Friday.

Fact is, most of them really don’t know what they are talking about.

As Fred Schwed Jr writes in Where Are the Customers’ Yachts? or A Good Hard Look at Wall Street, “Deep thinking continues to be, as ever, mostly second guessing.” The book was first published in 1940, and remains relevant even today. Schwed writes, “But is it surprising that no one of them is ever quite right? The best explanation is that some of them don’t know what they are talking about; and those who do know, don’t tell all they know, or don’t permit themselves to believe all they know.”

So, why try and predict something that is largely unpredictable? Well, there are several reasons. For one, “It seems that the immature mind has a regrettable tendency to believe as actually true that which it only hopes to be true. In this case, the notion that the financial future is not predictable is just too unpleasant to be given any room at all in the Wall Streeter’s consciousness. But, we expect a child to grow up in time... This, however, is asking too much of the romantic Wall Streeter - and they are all romantics, whether villains or philanthropists. Else, they would have never chosen this business, which is a business of dreams. But the ultimate dream they almost never shed: that there is a secret, meaningful and predictable, in the rise and fall of financial enterprises - that a “close study” of this and that will prove something; that it will tell the initiate when there will be a rally and give the speculator a better than even chance of making a killing,” writes Schwed.

Also, most investors like to know where the stock market is headed to. And this is where the so called “stock market” experts come in, to fulfil an inherent need.

Schwed writes, “For one thing, customers have an unfortunate habit of asking about the financial future. Now, if you do someone the signal honour of asking him a difficult question, you may be assured that you will get a detailed answer. Rarely will it be the most difficult of all answers - “I don’t know.””

And at times, the “cock and bull” story these experts come up with is largely to generate more business for firms they work for. “On the economic side there is no denying that the more financial predictions you make, the more business you do and the more commissions you get. That, we all know, is not the right way to act at all. But I doubt if there are many, or any, Wall Streeters who sit down and say to themselves cool, “Now let’s see. What cock-and-bull story shall I invest and tell them today”... The broker influences the customer with his knowledge of the future, but only after he has convinced himself,” writes Schwed.

The other kind of prediction maker is the chartist or the technical analyst, as they are popularly known these days.

Schwed writes, “He arms himself with a chart (the simplest sort of graph) which depicts the ups and downs in price of the market as whole or of a commodity. This he studies, well away from the news ticker. It is his claim that he can discern in this jagged pattern of behaviour, which reproduces itself, and that certain of the peaks, valleys, and wobbles tell him when it about to do it again.”

A chartist essentially bets on the fact that history will repeat itself. “When the student peers, however closely, at a graph of the Dow-Jones averages, for instance, all he sees for certain is a history of past performances clearly and conveniently depicted. That one can, by examining the line drawn already, make a useful guess on the line not yet drawn, must be predicated on the hypothesis that “history repeats itself.” History does in a vague way repeat itself, but it does it slowly and ponderously, and with an infinite number of surprising variations,” writes Schwed. And this is where the problem lies. History repeats itself too slowly, whereas chartists most times are trying to predict where the markets are headed month on month and at times even for a shorter period. And that is why a lot of them trading on their own money, do go bust.

“It is the popular feeling in Wall Street that chart readers are pretty occult professors, but that somehow most of them are broke. A busted chart reader, however, is never apologetic about his method - he is, if anything, more enthusiastic than the solvent devotee you may run across. If you have the bad taste to ask him how it happens that he is broke, he tells you quite ingenuously that he made the all too human error of not believing his own charts. This naïve thought comforts him; he doesn’t mind so much losing his money, but it would have been more than he could stand to lose his faith in his beloved chart system,” writes Schwed.