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India's Sensex to Rebound From 2009 Slump, HSBC's Duggal Says

March 17 (Bloomberg) -- Sanjiv Duggal, the HSBC Holdings Plc investment director who oversees the world's largest India fund, said the Sensitive Index will rebound from a near three-year low on cheaper valuations and government stimulus plans.

Stocks will benefit as India's government pumps about $100 billion to revive growth in Asia's third-largest economy and the rupee's 21 percent plunge against the dollar the past year lures back overseas investors, said Duggal, investment director at HSBC Holdings' Halbis Capital Management in Singapore.

"When you look at the world, India stands out," Duggal, 44, who oversees about $3 billion in Indian equities, said in an interview. "Valuations are at their lowest level ever; we can see markets inflecting up sharply given the fair amount of stimulus measures."

Shares in the Sensex, the only benchmark index among the so- called BRIC markets to record losses this year, trade at an average of 9.18 times reported earnings, down from a peak of 29.12 in January 2008, according to data compiled by Bloomberg. China's Shanghai Composite Index, which gained 18 percent this year, is valued at 15.89 times earnings. Brazil's Bovespa, up 5 percent in 2009, trades at 9.3 times while Russia's Micex index, up 23 percent, trades at 3.5 times earnings, Bloomberg data show.

Credit Crisis

Duggal's Luxembourg-based $2 billion Indian Equity Fund, which targets overseas investors, lost 76 percent of its value since December 2007 as the credit crisis wiped out more than $30 trillion from the value of global equities.

HSBC plans to start a new India-focused fund in the second half of this year targeting investors in countries that can't invest in its flagship vehicle, Duggal said, without naming them.

"Investors have moved from extreme optimism to extreme pessimism," said Duggal, who put out a "sell" call on Indian equities in December 2007 as he anticipated a drop in earnings growth and found stocks overvalued. "Extremes create opportunities; it's a good time to invest as India will probably outperform among emerging markets."

India's Sensex slumped 67 percent since reaching a record of 21,206.77 on Jan. 8, 2008. Vietnam's Ho Chi Minh Stock Index dropped 74 percent while Pakistan's KSE100 index declined 67 percent during the same period. The Sensex gained 2 percent to 8,943.54 yesterday and is down 7 percent this year.

"Rapidly growing countries have setbacks from time to time," Marc Faber, the publisher of the Gloom, Boom & Doom report, said in Hong Kong yesterday. Over the next two years, it's probably a good time to invest in emerging markets, he said.

Stronger Demand

Duggal is betting on a pickup in demand as the government pays out $45 billion in salary increases by March 2010 to 25 million households, amounting to 4 percent of gross domestic product, he said.

That coupled with farm loan waivers, rural employment plans and higher guaranteed prices for cotton and wheat to India's 234 million farmers will boost consumer spending, Duggal said.

The fund holds more shares of property developers and carmakers than represented in the benchmark S&P/IFC Emerging Markets Investable India Index, after being neutral on the industries in 2007. It also has more materials, industrials, health care and information technology compared with the benchmark, he said.

His investments in the past year include Maruti Suzuki India Ltd., the nation's largest carmaker and the fund's No. 3 holding, and DLF Ltd., India's biggest developer.

Duggal also added Idea Cellular Ltd. and United Spirits Ltd., India's largest liquor maker. He's cut his weighting on information technology to 15 percent from 20 percent and replaced Cairn India Ltd. with its U.K.-listed Cairn Energy Plc. Cairn Energy is the fund's largest holding.

'Cheapest Ever'

"Affordability is at its cheapest ever," Duggal said. "As prices come down and interest rates move lower, demand will pick up, there is huge potential in automobiles and residential real estate." Duggal declined to name stocks he plans to buy.

Duggal expects India's economy to grow at 6 percent annually over the next couple of years and company earnings will expand between 6 percent and 9 percent helped by declining commodity prices and lower interest rates.

The drop in global oil prices that's shaved $100 off a barrel of crude in the past year is allowing the government to cut subsidies on fuel and fertilizer, strengthening state finances, he said.

'Turning Around'

"The macro economic view for India is turning around," said Duggal. "India's fiscal situation and current account will improve even as other emerging and Asian countries will deteriorate."

Duggal expects domestic insurance companies and mutual funds to drive markets as they were net buyers of Indian equities last year even as overseas investors sold. Insurers bought an estimated $11.6 billion in stocks in 2008 while overseas investors pulled out a record $13.1 billion.

Indian insurance companies are expected to invest $14 billion in the year to March 31, 2010, according to Mumbai-based brokerage Motilal Oswal Securities Ltd.

An expected revival in the rupee may spur overseas investors to return, Duggal said. The rupee weakened to a record low of 52.1850 against the dollar this month and was the second-worst performer among the 10 most-traded Asian currencies last year.

"Local long term money will be the key driver for the market going forward," Duggal said. "Foreign investors too could turn net buyers as this is the cheapest they will get to buy Indian equities with the rupee's depreciation."

To contact the reporter on this story: Pooja Thakur in Mumbai at pthakur@bloomberg.net