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Hedge funds come hunting to India

A recent McKinsey report said India's growing market for consumer goods could reach $400 bn by 2010.

india Updated: Jun 15, 2006 18:20 IST

Hedge fund managers are going shopping for Indian stocks, especially those of medium sized firms in the consumer, technology and infrastructure sectors with potential to become blue-chips.

Does that mean that they think the rout, which has seen the Indian market drop by about 30 per cent since May 11, is over?

Not quite. Managers think the market could slip by another 4 to 6 per cent as what is left of the hot money withdraws.

But that won't stop them looking for stocks that have high earnings potential and use the themes of strong domestic demand and government spending on infrastructure.

"There are some very attractive opportunities ... The market right now is in a healthy disposition," John Morris, president of US-based Fulcrum Investment Group, said.

"The immediate flow of funds will be back to large cap market leaders, that's the obvious play ... There were a number of mid caps that were extremely attractive to us before the correction, I think they were disproportionately sold off."

Belief in the potential of India's economy and companies to yield high returns was a major topic of conversation at an Indian hedge fund event earlier this week in Geneva, organised by Jetfin Events.

India is expected to account for around 15 per cent of world gross domestic product by 2025 from around 2 per cent now.

Valuations of Indian stocks as measured by price/earnings ratios are expected to fall further from averages around 15 now. Prior to May 11 the average was estimated at above 20.

"We could see lower valuations as the market falls further, but not much more," a hedge fund manager said. "The mid-cap space is bigger and more mid-cap stocks fit the consumer, technology and infrastructure themes."

The consumer theme is based on rising affluence in India, particularly the growing middle class, which is now estimated to account for more than 50 per cent of India's population compared with less than 40 per cent in 1995.

A recent McKinsey report said India's growing market for consumer goods could reach $400 billion by 2010 from around $250 billion in 2003. That would make it one of the world's five biggest retail markets.

"What will these people want? Televisions, phones, mobile phone, cars ... That tells you about the sorts of things we are looking at," another hedge fund manager said.

"Bigger houses, mortgages and banks are another theme as is the luxury goods market, which isn't so obvious ... Technology goes with economic maturity and the shift away from an agricultural-based society."

On the infrastructure side, the government plans to raise spending on things like roads, airports, utilities such as electricity and water, railways and telecoms by about 75 per cent in 2002-2007 compared with 1997-2002.