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

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