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Tuesday, Nov 12, 2019

Cash-rich Indian funds await elusive correction

Fund managers are facing a dilemma: should they risk buying pricey shares, or sit on cash and wait for a correction.

india Updated: Mar 02, 2006 12:24 IST

Fund managers are facing a dilemma in India's booming stock market: should they risk buying pricey shares, or sit on cash and wait for a correction and possibly be left behind as shares keep climbing.

India's main stock index rose 9.4 per cent between the start of the year and Monday, pricing the market at a stiff 17 times forward earnings, higher than 10.2 for Korea's KOSPI and 12 for Taiwan's TAIEX.

Since Tuesday, when India unveiled its annual budget, the BSE index has risen a further 2.8 percent to record highs above 10,500 points. The budget aimed to boost economic growth in Asia's third-largest economy to 10 per cent in coming years from an estimated 8.1 per cent for the current fiscal year to March 31.

"We are trying to be pragmatic and invest bit by bit," said N Sethuram, chief investment officer of SBI Mutual Fund, who has only invested 40 percent of $645 million raised in December.

"If we don't invest, we will become underperformers in relation to the market," said Sethuram, whose fund manages $2.9 billion in assets.

Many fund managers share his anguish. Domestic funds have collected about $2 billion in the past three months, but they have invested only part of it because of concerns that valuations are too stretched.

Investors eager to bet on equities are expected to pour in another $1 billion in the next two months into local funds because returns on bank deposits are not attractive.

"In the absence of anything negative in the budget for a correction, I think by default some surplus liquidity will be deployed," said Anup Maheshwari, chief investment officer at HSBC.

Finance Minister Palaniappan Chidambaram pledged in his budget to boost spending on infrastructure such as roads and ports and cut excise duty on small cars, boosting shares in construction, cement and auto makers.

Shares in cement firms Associated Cement Companies Ltd and Grasim Industries Ltd and construction firm Larsen & Toubro Ltd have jumped between 4.4 per cent and 14.5 per cent in two sessions after the budget.

Car maker Maruti Udyog Ltd, 54.2-per cent-owned by Japan's Suzuki Motor Corp, raced up 12.2 per cent after the government cut excise duty on small cars to 16 per cent from 24 per cent.

Tata Motors Ltd, another beneficiary of the levy cut, has rallied 7.6 per cent.

Robust earnings

Some fund managers say the market is underpinned by robust corporate earnings.

"In the next three to four years, if the economy is going to grow at 7 to 8 per cent, which will keep the corporate earnings momentum of 15 to 18 per cent, valuations are taken care of," said S Naganath, chief investment officer at DSP Merrill Lynch Fund Managers.

Naganath, who manages assets worth about Rs 100 billion ($2.2 billion), is fully invested in his equities funds.

Foreign funds have also been bullish on India, pouring in more than $2.4 billion this year after a record $10.7 billion inflow in 2005.

But SBI's Sethuram said valuation worries remained.

Domestic mutual funds have been net sellers of $320 million so far this year.

Indian companies, which have been posting earnings growth of more than 25 percent in each of the past three years, are seeing their margins shrink due to rising raw materials costs and rising interest rates, he said.

"It is a tough game now," Sethuram said. "I would say valuations are marginally overstretched, but not grossly overstretched. There are already signs of some slackening in earnings momentum."

Still, strong demand from a rising middle class is expected to keep growth coming in.

"The last 18 months have shown that end demand is strong and the pricing power for corporates is there," Naganath said.