The Hindu Business Line : Non-emerging market funds also turn to Indian stocks

Diversified portfolio managers, who habitually track developed markets, are increasingly stepping away from the US and Western Europe. Instead, they are chasing emerging market companies. Among them are Indian companies, which have started featuring regularly among the equities followed by regular, mainstream funds.

Research house Morningstar has listed the funds Janus Contrarian and Janus Overseas at the top of the heap. As much as 21 per cent of Janus Contrarian is currently invested in Indian stocks. Janus Overseas too has a decent exposure. However, this is less of a surprise, as emerging markets have been traditionally followed by this "aggressive" fund.

India, which "does not get the same level of media attention as China does," is buttressed by several factors. These include its large middle class population (which has led to a surge in loan and mortgage activity), rapid economic growth and democracy. "India's explosive growth has owed more to entrepreneurial initiatives than Government-sponsored programs," it is noted. A labour force made up of many English speakers and increasing consumer spending are also seen as major attractions.

Some sections cite examples such as Reliance Industries and Tata Steel, which are billed as global businesses growing at a faster pace than some US counters. However, a concern expressed by many relates to the lack of a broad shareholder base. This makes many Indian stocks prone to sudden decisions by players like hedge funds.

"Given the risks, India fans would be much better off investing in a broader diversified emerging-markets fund than in an India-only fund," Morningstar has mentioned.

In fact, some contend that fund managers should shed their India holdings rather than add to them. For one, the Indian market has more than doubled in value over the last three years. While earnings growth has scaled up, many experienced managers are seeking to reduce their exposure. Among them is T. Rowe Price's New Asia, which is bullish on the long term but has been taking profits all the same. The same goes for Merrill Lynch Global Allocation, which is said to have become cautious.

It is pointed out that many of the risks inherent in other emerging markets still relate to India, where protectionist policies have put stiff limits on overseas holding in certain companies. Sectors such as banking and insurance, described as "the backbone of most financial markets," remain restricted. The logistics scenario is not encouraging either, given the country's poor infrastructure. Besides, there could be external pressures - including higher oil prices. The rising cost of oil imports has already affected its trade surplus.

Morningstar has further observed that rising US interest rates could present another problem, as higher yields in the US may drive investors to pare their exposure to "far-flung risky asset classes" such as emerging-market stocks.

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