Hedge funds take the long-term view on India

Most foreign investors in the Indian stock market have decided to sit out current volatility in the belief that rewards will justify the risks, delegates at an Indian hedge fund conference said today.

India's economic growth potential is as strong as it was before the recent equity price tumble and investors should keep faith with the market, they said.

The drop in Indian stocks from all-time highs - 28 per cent since May 11 - has raised questions about whether India's economic and earnings growth potential has been overestimated.

"I'm confident the present hiccup is more of a correction in a sustainable long-term path towards a mature economy," said Christoph Avenarius, a senior hedge fund analyst at Credit Suisse, told Reuters.

The sell-off was triggered by panic reaction to a number of factors including stock price falls around the world, the possibility -- later denied -- that India's government may tax income from stock investments, and higher benchmark Indian interest rates.


But most of those retreating were local investors, many from the stock futures market, and were doing so because of margin calls, some delegates said.

"India is an elephant on the move ...(It) is moving from being an agricultural-based economy to services," said Rakesh Bhargava, founder of US-based consultancy BlueSpruceGlobal Advisors at the conference organised by Jetfin Events.

"The industrial component is getting bigger ... That's the component to watch ... (Goldman Sachs) have projected (an annual) growth rate of 6 per cent for the next 20 years ... The planners are going for a higher rate."

Government officials have pencilled in higher growth rates of around 10 per cent for coming years.

"The potential of India is huge ... Many emerging market countries have been neglected for years and have all of a sudden experienced a huge inflow of capital," said Avenarius of Credit Suisse.

Goldman Sachs said it expects India to be the world's fourth largest economy by 2025 after the United States, China and Japan. By 2050 it is expected to be the world's third largest economy after China and the United States.

"By 2025 ... India will account for close to 15 per cent of world GDP," Ruchit Puri, senior vice president at financial services group Kotak Mahindra (UK) said.

Reforms, a highly educated, English-speaking workforce, a growing middle class, strong consumer demand, technical expertise and financial market liberalisation will all contribute to India achieving its economic aspirations.

But it won't happen overnight.

"India is a good wicket, but it's a test match rather than a one-day innings," Saleem Siddiqi, a partner at US-based fund of hedge funds manager Tapestry Asset Management told Reuters.

"How long it takes will depend on the country's infrastructure and also on the capital structure of Indian companies... From a corporate finance perspective it's a function of whether companies are able to tap the debt market."

Most Indian investment portfolios comprised stocks, stock- related derivatives such as convertible bonds or futures, and private equity.

But expectations are that the country's debt markets will develop to enable corporate access to what is often a cheaper way to finance organic growth or acquisitions and create another route for investors.

India's government plans to raise spending on infrastructure - roads, airports, utilities such as electricity and water, railways and telecoms - by about 75 per cent between 2002 and 2007 compared with 1997-2002.

- REUTERS