India emerges as an investment favourite

Entrepreneurial and shareholding traditions even extend to selling unit trusts in maternity wards.
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The Independent Online
India has proved to be one of the more popular emerging markets so far this year. The combination of cheap valuations, by comparison with other Asian stock markets and by its own historical standards, plus the potential of a population of 870 million enjoying rising living standards has proved irresistible to fund managers.

Since January, some $300m of new money has been pouring into India each month. Funds have been launched by Guinness Flight (0171-522 2100) and Kleinwort Benson (0171-623 8000) for private investors, by Abtrust for professional investors and by Threadneedle Asset Management and Templeton for domestic Indian investors.

The burgeoning middle class - there are some 200 million people with professional skills and an entrepreneurial tradition - gives India ballast against the fickle flows of foreign capital which have destabilised other emerging markets. With a savings rate well above 20 per cent of GDP, India has strengths that even China lacks.

The two are often compared because of their size, vast potential consumer markets and recent economic reforms. But India has been open to the West longer, is more industrialised, democratic, has an English-speaking heritage, a bigger middle class, and a tradition of equity investment with 15 million direct shareholders. Even the goody bags handed to new mothers in Bombay hospitals contain application forms for The Unit Trust of India, the world's largest unit trust.

Indian stock markets - there are 23 stock exchanges - took this summer's general election in their stride. Kenneth King, director of Kleinwort Benson Investment Management, says the decision by the coalition United Front government to continuemarket-oriented policies proves the compelling logic of what India is doing.

Ashwani Mathur, assistant investment manager with Guinness Flight, says politically India is pretty safe. Economically, the long-term story is also good, according to Vivek Sekhar, fund manager with Fleming. Real GDP growth is forecast at 6.5 per cent this year and 6.3 per cent next. Mr Sekhar expects a cut in interest rates in the next six months, which will help smaller companies and boost production. The fiscal deficit should be kept under control by further privatisations.

The recent budget encouraged foreign investment and import tariff and duty cuts. What is needed is a revival of domestic stock market interest to generate more excitement.

Earnings multiples at 12 times this year's earnings and 10 times next year's are well below the historic averages of around 20. Investors are spoiled for choice, which presents both opportunities and dangers. India has nearly 8,000 quoted companies, but quality is variable.

Hugh Young, managing director of Abtrust in Singapore, says the size and diversity of the market create dramatic mispricings, but the only way to benefit is to conduct exhaustive first-hand research and never rely on third-party research. Mr Sekhar covers the top 200 blue chip companies, which he says give the required exposure to the economy and top class management.

As always, fund managers differ in their assessments. Fleming, Morgan Stanley, Fidelity and Kleinwort are overweight in India compared with the IFCG Composite Index of emerging markets. Mercury and Templeton are underweight.

Ewen Cameron Watt, Mercury's head of emerging markets, blames prolonged settlement delays and registration problems. Although there is the option of buying in London via Global Depositary Receipts, the premiums can range up to 35 per cent.

Mercury's answer is to take good-sized stakes in a few carefully researched Indian companies. Its global emerging markets fund currently lists the Steel Authority of India and the Morgan Stanley India Investment Fund among its top 10 holdings. Mr King considers the recent volatility of premiums has created excellent arbitrage opportunities between domestic stocks and GDRs. The local trade must be executed first, he says, adding that he has never found domestic settlement to be a significant problem.

Investors wanting pure exposure can go for offshore open-ended funds like Guinness Flight's Madras Indian Equity Fund (minimum subscription pounds 3,500) or Kleinwort's India Fund (minimum pounds 3,000) or for London-listed investment trusts like Fleming India or Lazard Birla India.

Others can pick from an array of regional or global funds. Schroders' new Emerging Countries investment trust intends to devote more than half its assets to Asia, the largest initial investments in India and Malaysia.

Much will depend on the ability of the fund manager to pick the right stocks. According to the enthusiastic Mr Young, "India could be the jewel of an investor's portfolio. In terms of potential, the surface has hardly been scratched."

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