India's Small Caps are Best Bet, Emerging Global Says
Aug. 4 (Bloomberg) -- India's smallest companies may deliver investors the best returns as foreign inflows have pushed the benchmark index's valuation to the highest among so- called BRIC nations, according to Emerging Global Advisors, LLC.
"As the bull market extends, investors are more willing to take on additional risks and explore midcaps and small caps," said Richard C. Kang, who manages $120 million in equities at Emerging Global in New York. "The exploration of large caps in India is done."
Foreign fund inflows to India's equities have climbed 40 percent this year, making the Bombay Stock Exchange's benchmark Sensitive Index, or Sensex, the most expensive in Asia excluding Japan and the BRIC markets, which include China, Brazil and Russia. BSE Small-Cap index shares have returned almost four times the Sensex this year, and companies such as Supreme Infrastructure India Ltd. can be bought at about half the price of those in the benchmark.
India's domestic spending and infrastructure investment will lure investors as they bet on the South Asian nation's economic growth, Kang said.
Foreign investors purchased a net $5.8 billion of Indian stocks in June and July, making up half of the $11.7 billion going to the region's developing markets excluding China and Malaysia, Credit Suisse Group AG analysts led by Sakthi Siva said yesterday.
"Emerging markets have shifted in terms of power and importance," said Kang, whose investment are in the form of exchange traded funds on the New York Stock Exchange. "India has the greatest potential among emerging markets because of domestic consumption growth and infrastructure spending."
India's stocks may be headed for a period of "consolidation" after a recent rally, Nomura Holdings Inc. analysts let by Prabhat Awasthi wrote in a report today, recommending investors should move to a "tactical neutral" position even though the 12-month outlook for the country's equities remains positive.
The Sensex, which is extending last year's biggest rally in 18 years, is trading at 17.1 times estimated profit compared with 9.3 times for the BSE Small-Cap index. The Small-Cap gauge gained for the fourth day today, climbing 0.6 percent as of 12:50 p.m. in Mumbai, taking its advance this year to 14 percent. The benchmark measure, which tracks the 30 biggest companies, rose 0.2 percent today, extending its 4 percent climb this year.
Software maker Patni Computer Systems Ltd., lender Indian Bank and Mangalore Refinery & Petrochemicals Ltd. are among the largest holdings of Emerging Global, which recently started an India Small Cap exchange-traded fund and plans to start an infrastructure fund soon.
India's economy is forecast to expand 9.4 percent in the year through March, according to the International Monetary Fund. That would be the fastest pace since 2007.
"Investors want growth commensurate to the risk that one takes in equity markets," said Emerging Global's Kang. "You find it more and more in the emerging markets, and within them the outlook for growth looks most robust in India. With the small caps, we believe you are getting the best growth companies in the fastest growing market."
To contact the reporter on this story: Rajhkumar K Shaaw in Mumbai at firstname.lastname@example.org .