It is tempting to believe that there is a buying opportunity in Asian stocks. After the savage sell-offs in China and India so far this year, they are certainly better value than they were. Such sentiment probably lay behind yesterday’s big bounce for Indian stocks.

However, a nasty combination of inflation and steep valuations suggests their stock markets have not yet come to rest.

Inflation is an important factor in price/earnings ratios. For years, traders used the “Rule of 20” as a benchmark. This held that the market p/e should be equal to 20 minus the inflation rate. This broke down in the 1990s when p/e ratios exceeded 20, but the idea that higher inflation should lower the multiple paid for companies’ earnings remains valid.

Inflation is back as the market’s greatest fear. That fear largely emanates from China and India. Official data show headline inflation of almost 8 per cent in both countries. That is more than double the average for the G7.

Looking at their earnings multiples, a more worrying picture emerges. The “Chindia” stocks boom was based on multiple expansion rather than any great increase in earnings.

When it peaked at the beginning of this year, using MSCI data, India’s multiple was almost double that of the All Country-World index. China was only slightly behind, peaking at more than 90 per cent. Three years ago, both traded for less than the average world multiple.

Even after China’s stocks have dropped by a half and India’s by a quarter, their multiples remain 23 per cent and 41 per cent above the world’s average p/e ratio.

If inflation is a concern, logic suggests that p/e ratios for Chindia, and much of the rest of Asia outside Japan, should stabilise only when they are some way below the global average.

That implies that they have further to fall.