Merrill Lynch's Indian arm expects double-digit returns in Asia's fourth-largest economy for at least another half decade as a result of improved infrastructure, a consumer boom and offshoring.
DSP Merrill Lynch Fund Managers Ltd's president and chief investment officer S Naganath expects corporate earnings to grow by at least 15 per cent a year over the next five years, and stock market returns to at least match that.
The key Bombay index -- Sensex rose 13 per cent in 2003.
"Looking at Asia as a whole, there is an increasing view that incremental growth of a substantial magnitude will happen," Naganath told Reuters earlier on Tuesday.
"Within that, the maximum potential for growth to sustain for long periods of time are in India and China, given their huge populations, rising aspirations and the growth in infrastructure and consumption. The momentum has begun."
The three catalysts of infrastructure development, consumption and outsourcing will help industries from cement to financial services to software, Naganath said.
As of the end of December, DSP Merrill managed Rs 62 billion ($1.4 billion), the ninth-most among Indian fund managers.
India has gained from nearly a decade-and-a-half of economic reforms, and it now competitively exports a range of goods and services from auto parts for Toyota to research for Microsoft.
A consumer boom among the world's second-largest population, driven by rising incomes and aspirations, is spurring investment, Naganath said.
{{/usCountry}}A consumer boom among the world's second-largest population, driven by rising incomes and aspirations, is spurring investment, Naganath said.
{{/usCountry}}Broad economic growth is likely to have averaged 7.5 per cent in the two years ended March 2005 against four per cent in the preceding six years, when India battled over-capacity and a global slump.
Naganath expects India to grow at an average seven-eight per cent over the next five years, outpacing Asia's six-seven per cent.
"So long as the earnings trajectory is such that we will get around 15 per cent a year over the next three to five years, the market will deliver a return similar or better," he said.
Foreign funds sunk a record $8.5 billion in Indian shares in 2004, though Naganath said a strong dollar could temper flows.
But Naganath believes traditional perceptions about emerging markets being volatile or lacking transparency and corporate governance are giving way to optimism about growth prospects.
While Indian stocks underperformed bonds in the 1990s, when interest rates were higher and the stock market was lacklustre, Naganath felt this could change.
"Once investors are convinced that we are on a fast growth trajectory, equities can deliver better returns in the long term over other asset classes," he said.
About 30 per cent of his fund's assets are in equity-related plans, but Naganath sees that number rising over time.
In the near term, ample liquidity and easing inflation will support the bond market, which is growing rapidly as companies raise funds for growth. Naganath sees the widely-tracked 10-year bond yield down 25-50 basis points by end 2005.