News: 'India too hot to handle'

(Bloomberg 20/06/2006) Mumbai - Indian stocks may be too expensive even after falling from records set last month, and many analysts say the market will fail to extend the biggest two-day rally in two years.

Strategists at Deutsche Securities Asia Ltd, Merrill Lynch Asia Pacific Ltd, JPMorgan Chase & Co and Nomura International (Hong Kong) Ltd are among those who see share prices as too high relative to other emerging markets.

“I don't think that this market has finished falling,” said Spencer White of Merrill in Hong Kong. “I simply don't see enough factors to convince me that the 25% decline we have had in the last month really is the end.”

The Sensex has tumbled 22% from its peak on May 10, the biggest decline among Asian benchmarks. Last week, the Sensex surged 11% in the final two trading days as concern eased that rising interest rates around the world will limit economic growth. The rally was the biggest since May 2004 and resulted in a 0.8% gain for the week, the index’s first in six weeks, to 9884.51. The Morgan Stanley Capital International Asia-Pacific Index added 0.7%.

MSCI's Emerging Markets Index also snapped a five-week losing streak, adding 0.1%. The global index has fallen 20% from a record, reached May 8, on concern that higher rates will reduce demand for riskier assets. During that time, the Sensex has lost 21%. Indian stocks tumbled 10% on May 22, sparking one- hour trading halts by exchanges. Earlier this month, stocks fell after the RBI increased the repo and reverse repo rates. The Sensex is valued at 15.2 times estimated earnings for the current year, down from a high of 20.5 times on May 10. The price-earnings ratio is still above the MSCI emerging-markets index's 12.2 times.

Economists see India's central bank raising its key interest rate next month for the third time this year as the economy's expansion and higher oil prices spur inflation.

Domestic mutual funds were net sellers of stock from June 2 to 14, according to data from Sebi. The nine-day stretch, with as much as $475.4 million in net sales, was the longest this year.

Overseas investors have sold about $2.4 billion more stock than they bought since May 11, almost half their net $5 billion of purchases for the year through May 10.