Mumbai: Indian shares, up more than three quarters from 2009 lows hit in early March, are now fairly valued but may gain up to 10% in the next three months, most of the respondents to a Reuters poll said.
The Reuters Asset Allocation Poll of seven mutual fund houses conducted between 22 May and 28 May showed three willing to cut cash levels, which has remained in double digits for the industry in almost a year.
The optimism comes after India voted to power a Congress-led government, shorn of Left allies, with a decisive mandate earlier this month, giving a free hand to push critical reforms needed to fix the slowing domestic economy.
Sectors such as banks and infrastructure are favoured by fund managers, the poll showed, on improved prospects for long-pending policy decisions such as bank sector reforms and raising foreign investment in insurance firms and spending on infrastructure.
“If you are playing the stability or policy or better government or reforms, then it has to be basically these two sectors,” Samir Arora, fund manager at Singapore-based Helios Capital said last Friday.
Financials are the most favoured sector of the Indian funds industry, controlling nearly 18% of the assets of the diversified equity funds at April-end, data from ICRA showed.
Three respondents said they plan to maintain financial sector exposure. Another three said they would buy more.
Capital goods, the third most preferred sector of stock funds, are also in favour with three of the respondents expected to raise exposure and another two maintain current exposure.
Funds risk appetite is also showing sighs of improvement with more fund managers willing to bet on relatively riskier mid-cap stocks than large-caps.
However, some concerns have started to emerge given the sharp run up in Indian shares since election results on 16 May.
Although in minority, two of the seven fund houses polled said Indian shares were overvalued. Three said they could even fall in the next three months as the surge was driven by liquidity and sudden change in sentiments and not by fundamentals.
“I think we have run up too sharp and too fast without any change in the fundamentals,” Jayesh Shroff, a fund manager at SBI Funds Management, said.
The Bombay Stock Exchange index Sensex leapt 14.1% last week, its biggest weekly rise in 17 years, after the ruling coalition won an unexpectedly larger number of seats in parliament and raised hopes for speedier pro-market reforms.
The index closed 3.8% up on Wednesday, trading at 16 times its 12-month forward earnings, up from about 9.5 times in early March.