London: The booming Indian stock market, which hit a record high on Monday, is likely to fall over the next year because valuations and expectations are too high, said the manager of one of the biggest funds investing in the region.
Sanjiv Duggal, who runs around $8.5 billion in assets including the $6.3 billion HSBC GIF Indian Equity fund and the $137 million India Alpha hedge fund, told Reuters it would be hard for the market to make progress in coming months.
“We’re cautious on the market ... We think the market will drift downwards and there will be negative single-digit returns to the year-end and over the next 12 months,” he said in an interview late on Friday.
“Valuations are close to 20 times March 2008 earnings ... In some cases analysts have aggressive numbers. Already people are looking at March 2009 earnings -- they are looking a lot further out to justify valuations.”
On Monday India’s benchmark 30-share BSE index rose as high as 15,075.30 in early trading, driven by strong economic and corporate earnings and positive investor sentiment.
Some analysts forecast more gains ahead for the index, with Citigroup setting a target of 16,000 by mid-December, and up to 18,400 a year later.
Duggal also said factors such as a strong rupee, which has appreciated 9.5% against the dollar since the start of the year, and high levels of share issuance by companies will provide headwinds for the market.
“Fifty percent of corporate revenues come from dollar-denominated exports. This will start to have a drag in Asia. Earnings for Indian companies should start seeing downgrades.
“A lot of companies are looking to raise money and we’re more concerned about the smaller issues ... which won’t attract new funds to buy them ... With the market at all-time highs, you’re seeing a lot of people tapping that.”
Duggal said he favours stocks in sectors such as pharmaceuticals and real estate, which he considers more defensive. He has recently increased his long-only fund’s exposure to real estate from less than 1% to around 4.5% and is net long the sector in his hedge fund.
“We like the office space side, (providing space) to IT, business process outsourcing and financial services. There is a lot of demand for good quality property,” he said.
However, he is underweight banks in his long-only fund and short in his hedge fund.
“Banks have risen because of the valuations people are giving their life assurance businesses. We think it will become more competitive and valuations are way too aggressive.”
He has also increased his fund’s relatively low exposure to the technology sector.
“With the movement in the rupee, technology got most affected from a market perspective. It has underperformed the market significantly since mid-April, but companies have partly hedged their rupee risk away.”