Indian policies to lure foreign investors and revive Asia’s third-biggest economy are driving the nation’s largest money managers to accumulate automakers, property companies and metal producers that stand to benefit most from a recovery.
Sunil Singhania, the head of equities at Reliance Capital Asset Management Ltd., is buying property and engineering stocks while Sampath Reddy, Bajaj Allianz Life Insurance Co.’s chief investment officer, is selling drugmakers and telecommunications shares in favor of mining companies.
The benchmark Sensex index has increased 26 percent this year, the most among the so-called BRIC nations, as Prime Minister Manmohan Singh proposed easing foreign ownership curbs on Indian retailers and airlines. Goldman Sachs Group Inc. upgraded the nation’s equities on Nov. 29 citing a “strong recovery in growth” next year.
“The last two years we were all hiding behind so-called safe stocks,” said Singhania, who helps oversee about $16 billion at Reliance and manages the nation’s best-performing fund in the past decade. “The government means to take this reform process ahead and that is very clearly reflected in the optimism in the market. We think that is going to continue.”
The Sensex’s gain was more than twice the advance of the MSCI BRIC index this year and compared with a 1.5 percent increase for the Shanghai Composite Index. Indian stocks rallied as the government responded to the threat of a credit-rating downgrade with its biggest push in a decade to open up the economy to foreign investment.
The policy actions were the “trigger” for Mahesh Patil, co-chief investment officer at Birla Sun Life Asset Management Co., to switch from so-called defensives to cyclical stocks that would gain from a cut in interest rates. Birla is India’s fourth-biggest fund with $13.3 billion in assets.
Patil said he bought automakers such as Tata Motors Ltd., the Mumbai-based owner of Jaguar and Land Rover luxury brands, and ICICI Bank Ltd., the second-best performer in the Sensex this year. He sold consumer-goods makers such as Hindustan Unilever Ltd., a unit of the world’s second-largest consumer-goods maker, and ITC Ltd., Asia’s second-biggest tobacco company by value. The BSE Fast-Moving Consumer Goods Index trades at 34 times estimated profit, more than double the Sensex’s valuation, after soaring 46 percent in 2012, data compiled by Bloomberg show.
“The earnings downgrade cycle has bottomed out and that is a sentiment booster,” Patil said in an interview on Dec. 19 in Mumbai. “With the government trying to push reforms, economic growth will normalize next year.” The Birla MNC Fund, overseen by Patil, has beaten 99 percent of its peers in the past five years, data compiled by Bloomberg show.
Reddy, who manages $7.5 billion at a venture with Europe’s biggest insurer, said this year his funds started adding consumer discretionary stocks after being invested in defensive stocks including drugmakers and telecommunication firms for the past four years.
He bought shares of Tata Steel Ltd., India’s largest producer, and aluminum maker Hindalco Industries Ltd. He also purchased Ahmedabad-based Torrent Power Ltd. for its “rock-bottom” valuation. Torrent trades at 1.5 times its book value, the lowest in more than three years, data compiled by Bloomberg show.
Standard & Poor’s, which cut its outlook on India’s credit rating to negative on April 25, said Dec. 11 that a downgrade was still likely if India’s political climate worsens and the pace of fiscal reforms slows.
Companies on the Sensex are valued at an average 15.4 times earnings, the second-most expensive stocks among the BRIC nations. Brazil’s Bovespa Index trades at 17.6 times, Russia’s Micex Index at 5.5 times and China’s Shanghai Composite Index at 11 times. That compares with a multiple of 12.1 for the MSCI Emerging Markets Index.
“We’ve had a few reforms but still have a long way to go to have a meaningful impact on India’s fundamental problems,” Sanjeev Prasad, senior executive director of Kotak Institutional Equities, told Bloomberg TV India from Singapore on Dec. 19. “The political atmosphere is still dysfunctional, not very supportive of big-ticket reforms.”
Singh’s administration pared fuel subsidies on Sept. 13, approved changes to a century-old land law on Dec. 13 to help end protests that have delayed projects and eased rules for setting up banks on Dec. 18. Finance Minister Palaniappan Chidambaram said Dec. 20 he expects legislation to allow foreigners to increase holdings in insurers to be passed in the next session of parliament.
Singh won parliamentary support on Dec. 7 for the retail plan and Chidambaram pledged on Dec. 14 more steps to boost an economy growing at the slowest pace since 2009.
Reserve Bank of India Governor Duvvuri Subbarao signaled higher odds on Dec. 18 for a cut in interest rates next year as he held borrowing costs unchanged for a fifth policy meeting. Goldman Sachs said the next day it sees a “high likelihood” of a 50-basis point reduction in a policy review due on Jan. 29, Tushar Poddar, the bank’s chief India economist, wrote in a note to clients.
The measures have drawn more foreign inflows into Indian equities. Overseas investors bought a net $24.2 billion of stocks this year, the most among 10 Asian markets excluding China tracked by Bloomberg.
Goldman Sachs upgraded Indian equities on Nov. 29 to overweight from market-weight, joining Morgan Stanley, JPMorgan Chase & Co. and Bank of America Corp. in forecasting gains for the nation’s equities in 2013.
Birla’s Patil expects a 15 percent return from the Sensex next year, with much of the advances coming in the first six months. The nation’s factory output grew at the fastest pace in more than a year in October, a Dec. 12 report showed. A trade ministry report two days later showed benchmark inflation rate unexpectedly eased in November to a 10-month low.
“From here, growth will only inch up, Reliance’s Singhania said. ‘‘Same is true for earnings and reforms.’’