Rebound for Indian Stock Market?

Sanjiv Duggal, who manages the $6 billion HSBC Indian equity fund, is reducing cash and shifting his strategy from defensive to growth plays

HSBC Global Asset Management believes the sell-off in India's stock market has been overdone and sentiment is too pessimistic considering the solid fundamentals of many of the listed companies there. It is for that reason—plus expectations of relatively strong economic growth—that the fund house believes the market is poised for a rebound and will deliver solid returns over the medium-term.

Sanjiv Duggal, the Singapore-based fund manager of the $6 billion HSBC Global Investment Funds—Indian Equity portfolio, has turned bullish on India after turning negative on that market in December last year due to what he then considered to be stretched valuations. Just as optimism led the market to overshoot on the upside last year, he believes all the negative news related to growth, inflation and interest rates have been overplayed and it is time to reconsider.

Due to the massive increase in food and energy prices, India's headline inflation has been surging rapidly. Wholesale prices rose from 3.83% in late-2007 to a multi-year record high of 11.91% in early-July 2008. Duggal expects commodity prices and, consequently, inflation to moderate as global demand slows. He also expects the tightening monetary policy of the Reserve Bank of India to help ease inflationary pressures.

"As the recent interest rate hikes need time to take effect, inflation may rise further before peaking later this year, and then fall," says Duggal, who is an investment director at Halbis, the active-investment specialist of HSBC Global Asset Management.

Fear of a severe economic downturn has been one of the major triggers of the recent correction in India's stock market, which has been the case for most markets in the region. Slowing global growth and soaring oil prices have led to lower growth estimates. India's GDP growth is expected to slow from 9.1% in the fiscal year 2008 to around 7.5% to 8% in the fiscal year 2009.

Although growth is moderating, Duggal notes that India remains the world's fastest growing major economy after China.

"Solid domestic consumption, favourable demographics and increasing investment in infrastructure remain the key growth drivers for India," he says.

"The Indian economy is also less vulnerable to external shocks than other economies in Asia because exports account for less than 15% of the country's GDP," he adds, making India among the least export-dependent countries in the region. In contrast, Hong Kong's exports make up around 167% of its GDP, while in Malaysia and Singapore the figure is above 90%.

Given the country's overall economic growth prospects, Duggal considers valuations of India shares attractive following recent sharp corrections. The Bombay Stock Exchange Sensitive Index (Sensex) is trading at a price of around 14 times 12-month forward earnings compared to a high of over 30 times P/E at the market peak in January 2008.

"While macro conditions are expected to remain tight in the near term, most of the bad news should have been discounted," Duggal says.

In July, Duggal reduced the cash position of his Indian equity portfolio to 3% because of the attractive opportunities in the market and shifted his bias away from defensive plays into growth-oriented stocks. The fund's top three sector allocations are basic materials (21%), technology (20%), and oil and gas (13%). The fund's top five holdings are oil and gas producer Cairn Energy; industrial metals maker Jindal Steel & Power; and three software and computer services companies—Wipro, HCL Technologies, and Tata Consultancy Services.