Sensex overtakes Dow, finally

Index closes at an all-time high of 11,183.48, against Dow's 11,154.54

Business Standard Thursday, March 30, 2006

The BSE Sensex today overtook the US equity benchmark index, the Dow Jones Industrial Average, when it closed at an all-time high of 11,183.48 points. The 30-share Dow, the oldest equity index, had closed at 11,154.54 points yesterday after a drop of 96 points in reaction to the interest rate hike by the Federal Reserve, talks of more hikes in the offing and the price of crude oil crossing $66 per barrel.

The Sensex today gained 97 points to touch a new high, powered by leading pharmaceuticals and technology stocks. Strong fund flows coupled with expectations of strong fourth-quarter earnings aided the rally, dealers said. The Sensex has given a return of over 75 per cent over the past year (from 6,367.86 points to today’s close of 11,1183.48 points) against the Dow Jones return of a mere 7.20 per cent (10,405.70 points to 11,154.54 points on Tuesday). Even in the past three years, the Indian market gave more than five times the return delivered by Dow Jones.A few weeks ago, the price-earnings (P/E) ratio of the Sensex surpassed that of Dow Jones.

Analysts have been talking about high valuations of Indian stocks for nearly a year now, but the market has been scaling new highs on the back of strong fund inflows. Currently, the Sensex is trading at a trailing 12 month (P/E) of 20.53 against the Dow P/E of 18.6.But some analysts maintain that stock market in India still may not be more expensive than the developed markets given the pace of earnings growth. Corporate earnings are likely to grow by 15 per cent in the coming financial year, while earnings growth in the US is estimated to be around 8 per cent, which implies that based on forward earnings, India trades at a lower earnings multiple.

Traditionally, despite higher growth rates, emerging markets have not got higher valuations than developed markets as they scored less in several other parameters like macro imbalances, corporate governance, inefficient resource allocation and weak banking systems. However, now America is seen as failing on all these counts, especially given its huge trade deficit and corporate governance issues.