India's Run-up: Frothy territory?

Sometimes too much of a good thing is indeed too much.

The Indian stock market has been hotter than ever. The run-up has been justified, given the economy's growth, the emergence of a solid middle class, and a general sentiment that the BRIC economies (Brazil, Russia, India, and China) is where all the opportunities are.

But as any trader knows, intense buying at a peak is what starts a bubble. P/E levels are high for the Indian index, the Sensex, and many of the smart money investors (fund managers) are backing away.

"Thanks to investors like Mr. Reddy, the bellwether Sensex stock market index in Mumbai soared 45 percent in 2005, and it has already risen 20 percent in the first three months of this year. The impressive gains have been spurred by India's surging economy, which posted a growth rate of 7.5 percent last year.

At the same time, the country has attracted more overseas investors, who poured $10.7 billion into Indian equities in 2005, and $4.13 billion in just the first quarter of this year.

But analysts and fund managers are cautioning that the stock market pendulum may have swung too far, and they warn that some companies are highly overvalued.

As a result of such concerns, the Sensex recorded a two-day decline of 3.6 percent last Wednesday and Thursday, the steepest in six months. The markets were closed Friday for Good Friday, but investors saw a buying opportunity Monday, sending the index up 2.7 percent."