Infina Finance Ltd., a Mumbai-based $190 million hedge fund, has turned the most bearish in a year on India’s stock market and will short if it rallies further.
“Right now we have the lowest net longs than we had in the last 12 months,” Venkat Subramanian, Infina chief executive officer, said in an interview. “If the market goes up any further, I would become net short.”
The long-short equity fund, which counts billionaire Uday Kotak and Kotak Mahindra Bank Ltd. among investors, is expecting a correction as foreigners allocate money to other regions and stock valuations become expensive. Indian equities have rallied as Prime Minister Narendra Modi pledged to revive investments and manufacturing while curbing graft after being swept into office a year ago. The economy grew by 7.5 percent in the January-March period, faster than the previous quarter’s 6.6 percent rate.
“Current market sentiment is very bullish, but it is possible that earnings expectations won’t be met” as it will take at least another 15 months before the government’s actions can bolster company earnings, Subramanian said. “Companies in consumer goods, telecommunication services and auto-components could be the space where significant disappointments could happen.”
The fund, which has the capacity to use leverage though it’s not employing it, has returned about 16 percent every year since its inception in 2008, according to Subramanian.
Earnings for companies in the benchmark S&P BSE Sensex Index are estimated to grow about 31 percent in fiscal 2016. That compares with about 13 percent for those in the MSCI Emerging Markets Index.
The Sensex’s valuation of 15.4 times projected 12-month earnings is about 30 percent higher than the MSCI Emerging Markets Index. The benchmark closed 0.9 percent higher at 28,020.87 points. It has added 1.9 percent this year.
“Things are improving on the domestic front as this government has started doing things which will start showing up in company earnings in 15 to 18 months,” Subramanian said. “But the market has already paid for all of it and that too with foreign money.”
Foreigners have invested $6.3 billion in Indian equities this year compared with $9.9 billion in the first six months of 2014. Overseas fund managers bought stocks and bonds worth an unprecedented $42 billion last year, data compiled by Bloomberg show.
The fund, which is currently managed by a five-member team that includes three analysts and a dealer, is branching out into private equity and plans to invest in sectors such as food processing, information technology and engineering-related startups.
Infina is setting up a subsidiary in Dubai to invest in overseas markets, especially in U.S. equities. The unit, in which Infina will initially invest 2 billion rupees ($31 million), is awaiting approval from the country’s central bank.
“My own comfort is more with investing in the U.S. market than in other overseas markets,” Subramanian said. “We will look at themes which we can’t get in other parts of the world. For instance in technology and biotech, where the U.S. market has world-beating companies.”