Unfazed Indian fund managers eye large-cap stocks

Written by Reuters | Mumbai, January 28: | Updated: Jan 28 2008, 20:16pm hrs
India's fund managers plan to buy large-cap stocks mainly from auto and financial sectors in the coming 90 days, undeterred by the recent fall, a Reuters poll showed.

None of the 10 fund firms that took part in the Reuters Asset Allocation Poll during Jan 23-25, said they would cut equity exposure -- at a one-year high as of end-December -- and half of them said they would reduce cash in favour of stocks.

Most of the respondents expect India's benchmark index, down about 10 per cent this year on fears of a global slowdown, to rise at least 5 per cent in the next three months.

"Cash becomes riskier and riskier once markets have come lower and lower because the propensity to go up to the same levels where it was trading is much higher," R Rajagopal, Chief Investment Officer of DBS Cholamandalam Asset Management, said.

Fund managers would not like to sit on cash as they ran the risk of underperforming if the stock market rebounded, he added.

The money will flow to large-cap stocks, with 70 percent of the respondents expected to raise exposure to such stocks, and move away from relatively illiquid mid-cap and small-cap shares.

"After this correction, lot of large-cap companies have come to such attractive valuation levels, they offer more potential than the mid-cap and the small-cap space," Rajagopal said.

INTEREST IN AUTO, FINANCIALS

Fund managers will focus on financial services and auto companies on hopes of lower interest rates, the poll showed.

Diversified equity funds held 13.59 per cent of their equity assets in financial services stocks at end-December and 90 per cent of the respondents plan to increase exposure further.

"It's a sector which is a proxy to the India growth story and people are looking at that rather than companies which depend on the global economy," Mahesh Patil, Vice President at Birla Sun Life Asset Management, said.

Some state-run banks were available at attractive valuations while this month's correction has turned many financial services firms into attractive investment options, he said.

Lower rate expectations has also attracted fund mangers to battered auto stocks, on hopes cheaper funding would boost sales.

"We have seen the peak of the interest rates the fallout of that is auto stocks will start moving up because there's a direct correlation between interest rates movement and the auto sales," Rajagopal, who bought Ashok Leyland in December, said.

Diversified funds cut exposure to auto stocks to 4.4 per cent of their equity assets at Dec-end from 8.16 at Jan-end as the BSE Auto Index rose only 2.7 per cent in 2007 as compared with about 47 per cent gain in the benchmark BSE index.

A majority of the bond fund managers are also looking to cut cash levels in favour of bonds as they expect rates to ease.

"Fund managers are expecting interest rates to fall due to weaker economic outlook and hence they are increasing exposure to bonds," Mahhendra Jajoo, head of fixed income of ABN AMRO Asset Management, said.