India and China are finally converging. No, we do not mean this in terms of the size of the two economies. Or in terms of Olympic wins, despite Abhinav Bindra’s welcome gold medal.
Take a look at the major stock market indexes in the two nations over the past month. The Sensex is up more than 15%. Shanghai’s main index is down 13%.
The result: Equity valuations in India and China are converging. The Sensex had a trailing price-earnings multiple, based on past earnings of its component companies, of 18.77 at the close of trading on Monday. And Shanghai had a trailing multiple of 19.12.
There was a yawning gap in valuations at the beginning of this year. Chinese shares were almost twice as expensive as Indian ones. Not any longer.
Now, with both markets having similar valuations, it will be interesting to see who investors back: the country with large deficits but good companies (India) or the country with a huge trade surplus but weak firms (China).