The easing of geopolitical concerns, economic reforms and continued outsourcing deals by overse...
The easing of geopolitical concerns, economic reforms and continued outsourcing deals by overseas corporates are raising fund managers' optimism about the Indian market.
Gradually increasing levels of liquidity, reflecting renewed optimism, have helped the Mumbai Sensex 30 Index post growth of 4.1% over the calendar year to 25 June and 9.4% for the 12 months to the same date.
Hugh Young, manager of the Aberdeen International India Opportunities fund, says the easing of geopolitical fears has had a significant impact on the Indian stock market, eroding the risk premium put on the asset class. Much of the geopolitical concern centres on the country's tense relations with neighbour Pakistan. These have been strained by fears of a nuclear arms race between the two, coupled with ongoing border skirmishes in the disputed Kashmir territory.
The overspill of the disputes into sectarian violence in both countries has led to foreign investors adopting a more wary attitude to the country, Young adds, but recent peace proposals have given fresh hope.
'Reflecting the ongoing thaw in relations between India and Pakistan, the two countries have restored diplomatic ties and civil aviation links as part of a new peace initiative,' he says.
Lucy Parken, an analyst on Schroders' emerging markets team, notes the Iraq war also dented confidence and weakened growth in the short term.
'This has been offset by improving economic strength and further progress on privatisation,' Parken says.
She remains confident the longer term picture is still positive. 'Industrial growth averaged 6% in the fourth quarter of 2002 and these high growth levels are predicted to continue, helped by the domestic economic recovery, the consumer credit expansion, the continued strength of the information technology sector and the recent pick-up in infrastructure investments,' she adds.
Young agrees the government's commitment to both economic reform and privatisation has bolstered investor confidence and broadened the number of stocks available.
'The government signalled its commitment to reform as it invited fresh bids for the privatisation of the Shipping Corporation of India,' he says.
'The upcoming government placement of carmaker Maruti Udyog was seven times oversubscribed, further underscoring the government's commitment to privatisation.'
Ted Pulling, manager of the JP Morgan Fleming Indian Investment Trust, says the outsourcing theme remains attractive as Western companies continue to look to India and its competitive labour costs when outsourcing labour intensive aspects of their businesses.
Companies such as Prudential, Powergen, Aviva and, most recently, BT, have announced outsourcing deals involving the transfer of call-centre operations to India.
'Indian companies offer good investment opportunities and in the coming year, the country is likely to post the highest return on equity in Asia, at about 18%, Pulling says. Corporate India has cut costs, streamlined businesses, and reduced debt.
'The recent outsourcing deals provide further evidence India is benefiting from global deflation due to its low-cost services sector.'
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