Two US fundmen see outperformance by India this year

Going global still remains a good, sensible theme for 2011 and some of the best bargains continue to lie outside the United States and Europe in markets like India that have been less picked over by professionals, say foreign investors.

Strong economic recovery and increased attention from global investors drove at least two markets in the Bric grouping of Brazil, Russia, India and China to record highs in 2010. At 17.4%, India grew the fastest after Russia, which rocketed 23%. Brazil was up just 1%, while China was down 14%.

The Bombay Stock Exchange’s Sensitive Index gained 3,044.28 points to end 2010 at 20509.09.

Foreign investors seem to think the run-up will continue.

“What monetary tightening couldn’t do to the Indian stock market, the corruption scandal finally did. So, November-December was painful, but the markets rebounded. We believe that Indian policy makers will clamp down on corruption. They know they have to do that to compete with other Asian countries for inflows from foreign institutional investors (FIIs). India is solidly attractive in 2011,” said Richard C Kang, chief investment officer at New York-headquartered Emerging Global Advisors.

Emerging Global Advisors introduced two new India-themed exchange traded funds (ETFs) on the New York Stock Exchange last year. EG Shares Indxx India Small Cap ETF and EG Shares Indxx India Infrastructure Fund offers US investors exposure to both small-cap companies, as well as infrastructure growth in India.

If the Brics represent a family of emerging markets, India is the “oft-ignored middle child,” says Kang. “There are over 20 China-focused ETFs in the New York Stock Exchange. India has six. Given India’s potential, we wonder why it doesn’t have 10 or 20 ETFs.”

A strong run-up in many large Asian stock markets has added to concern that some are in danger of a bubble bursting.

Marc Harris, co-head of global research for RBC Capital Markets, acknowledges those fears, but told the WSJ: “Part of the reason why these countries are getting their due is because they are really coming into their own.”

Rising inflation is fuelling concerns that the Reserve Bank of India will tighten policy in 2011, which could crimp growth.

However, investors point out that RBI’s decision to raise the repo and reverse repo rates by 25 basis points in November didn’t really hurt India.
In contrast, speculative money sloshing into China whooshed out when the country began monetary tightening in early-2010 and followed it up with more rate hikes.

“Tightening was a dominant theme holding back Chinese stocks but things may pan out differently in India. It is in good shape to outperform in 2011,” said hedge fund manager Neil Rattner.

FII inflows into Indian equities hit $28.8 billion in 2010, smashing the $17.7 billion record set in 2007, before the global financial meltdown.

Some analysts, however, caution that the red-hot FII inflows rallying the Indian stock market will be re-directed into developed markets if the US economy comes roaring back this year.