This bull run is no bubble

About two months ago, finance minister Palaniappan Chidambaram said that he'd be worried if the benchmark 30-share index, the Sensex, hit 8,000 points. When that happened this month, Chidambaram scrambled to say that he'd changed his mind and the market didn't look over-heated. Investors, who've since taken the index up nearly another 500 points, don't seem to care either way. There are sound reasons for their optimism. Broadly, there are three, fairly sound, reasons why the market is surging. One, over the last 18 months or so, the global investor has suddenly discovered the depth and potential of India. Compared to China, whose companies are funded by non-transparent bank finance, India's companies have raised and deployed funds from stock markets for many years. Two, through the mid-1990s, India's markets have gained depth, the qua-lity of investors has improved and corporate governance ��� especially in the new, know-ledge-driven companies ��� is exceptional. Both factors are attracting huge volumes of investor dollars from across the world. Finally, profits at India Inc, which is what equity investors buy into, are robust and expected to grow. This last point is important to understand why this surge is more robust than the frothy exuberance of the Harshad Mehta-Ketan Parekh eras. Even at today's dizzying heights, the Sensex sells for less than 17 times its underlying profits. That's low, compared to the 35 to 52 times profit multiples that the index hit during the Parekh or Harshad bubbles. Remember, the lower this price earnings multiple, the steadier the market. And looking ahead, things look even better: Today's Sensex is worth about 14 times the earnings expected in the next quarter, which means that there's still room to grow. How long can the party continue? For as long as India's companies grow and make profits. For that to happen over a long time, many things have to fall into place, things that boost productivity and promise a better, healthier life for people.