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Is It Time to Get Out?

The Indian stock market has had an impressive run over the past five years. Eaton Vance Greater India (ETGIX), for instance, posted a greater-than-41% annualized return over this period, turning a $5,000 investment into nearly $28,000. Not too shabby.

Holdings of the fund include ICICI Bank (NYSE: IBN) and the recently introduced ADR, Sterlite Industries (NYSE: SLT). ICICI Bank is up 136% over the past year, while Sterlite is up 12.5% since it hit the U.S. markets in late June.

So, are the good times coming to an end for Indian stocks?

The Economist sure seems to think so. A February 2007 article noted that, from an economic standpoint, India's "prices are rising fast, factories are at full capacity, [and] loans are piling up." Moreover, inflation has fluctuated between 4% and 6% over the past year and "99% of Indian firms report that they are operating above their optimal capacity." In other words, supply can't keep up with demand, and domestic prices have tremendous upward pressure.

OK, but economic statistics aren't always good predictors of the stock market, right? The Economist issues a warning about Indian stocks as well: "If you're looking for a stock market bubble, Indian share prices have risen more than four-fold over the past four years, far more than in China. If something is not done, then a hard landing will become inevitable."

Needless to say, The Economist's editors won't be buying shares of the Eaton Vance fund anytime soon.

What this means for you
Even if you don't believe what the Economist article says about India, it might be a good time to look closely at any Indian stocks you own, just to make sure they're reasonably valued.

Why should you do that? For one, The Economist was pretty much spot-on when the April 13, 2000, issue called the growth projections of the American economy "rosy" and said if actual growth fell short, it might be "brutal" for Wall Street. As we all know, economic growth did indeed fall short of expectations, and investors were punished harshly -- especially in the new economy sector of technology.

In 2001 alone, many of the overheated U.S. tech darlings came crashing down. The Nasdaq 100 dropped 31%, along with names such as Comcast (Nasdaq: CMCSA), Xilinx (Nasdaq: XLNX), and Flextronics (Nasdaq: FLEX).

it mentions FLEX specifically... will it miss/go down after the report?
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