The Indian market is on a record-testing rally. We talked about the risks and the potential rewards of chasing Mumbai stocks and ADRs on CNBC's Trading the Globe. Watch the video.
Mumbai benchmarks are up almost 17% so far this year -- and up 27% from its May lows -- outperforming even the rest of the emerging world. Another 2% higher and it will break its all-time peak from two years ago.
However, some investors are now worried that the market is moving from a "growth at a reasonable price" mentality to hunting "growth at any price." If so, this is admittedly a little ominous, and it is a good reason to be cautious. Likewise, while overall emerging markets are still not expensive, India always trades at a premium, and that makes some investors nervous.
How big is the premium? Global emerging stocks are trading at around 1.9 times trailing book value and 11.1 times estimated forward earnings. Indian stocks are trading at 19.9 times forward earnings and have gotten as rich as a P/E of 26 earlier this year. But remember two things:
1. The last time Indian stocks were trading at these prices in January 2008, the market was much richer than it is today, trading at around 25 times earnings.
2. Indian earnings are growing at a rate of 15% to 20%.
Beyond near-term valuations, India offers plenty of positives for investors looking for strong fundamental improvement.The big thing is that India's biggest companies are finally starting to tap the credit markets in an organized way. Previously, both bond and stock issuance was a little thin, but now that the country's biggest enterprise, Reliance Industries, is launching a $1 billion bond offering, that could be changing.
Of course, this could be a double-edged sword if the Indian corporate debt market leads to Brazil-style capital flows. Delhi is already warning that it will clamp down if a flood of Western money starts to look "disruptive" to the rupee or the overall fiscal environment.
Favorite ways to play India? There are not many ADRs . . . less than 20, really . . . and while there are plenty of ETFs, most take a somewhat niche-oriented approach to the Mumbai market. We like Tata Motors (TTM, quote) -- which is now raising its float by another $750 million, so there should be plenty of room for new investors -- and banks like IBN (quote). Lending activity in India is expanding fast, and the biggest banks are at the thick of it.