Mumbai: Financial sector stocks could lead the Indian share market’s rise over the next three to five years as banks benefit from the country’s growing savings rate and a rebound in economic activity, a top fund manager said.
Manish Kumar, who oversees Rs500 billion ($10.8 billion) as head of investments for ICICI Prudential Life Insurance Co, said he also favoured power and related engineering firms but is wary of real-estate companies given their lofty valuations.
Among the top-10 holdings in his Maximiser Fund, are State Bank of India, the country’s top lender, HDFC Bank and Axis Bank, in keeping with the fund’s overweight stance on the financial sector.
“That is a call we have maintained,” Kumar said in an interview on Thursday.
He said banks’ earnings could be muted in the near term as treasury income dwindles and credit growth takes some more time to revive significantly.
But they remain a structural long-term growth story as more and more savings get channelled through the banking system.
India has about $400 billion in domestic savings but little is funnelled through the banking channel currently to fund the country’s huge requirements to build infrastructure.
He said India’s economic growth has shown signs of strong revival and as capex spending picks up, bank lending will go up.
India’s industrial output grew a faster-than-expected 9.1% in September from a year earlier and finance minister Pranab Mukherjee last week said the economy could expand between 6 and 7% in the year to March 2010.
“We are going to maintain our overweight stance on financials and we are, from a long-term perspective, comfortable with the valuations,” said Kumar, who also holds stakes in Punjab National Bank and Oriental Bank of Commerce.
Bets on power, wary of realty
The fund manager said his portfolios were also overweight on power sector shares, which are likely to benefit from India’s plan to add large generation capacities over the coming years. “There is a huge power shortage in the country,” he said.
“There is going to be a window of opportunity to make a good amount of money in merchant power,” he said, adding engineering firms supplying equipment to the sector would also benefit.
The fund manager has picked stakes in Bharat Heavy Electricals and Cummins India within the sector.
India estimates it needs to spend $500 billion to fix its crumbling infrastructure in its Eleventh Five-Year Plan ending in 2012 with nearly a third of that in the power sector alone.
Its peak power capacity is nearly 14% short of demand, while its transmission and distribution losses are a staggering 40%, according to Planning Commission data.
The Mumbai-based executive said he was shying away from real estate sector given its sharp rise and valuations that are pricing in significant increase in execution.
“That is something we believe is at risk,” he said.