F&C bets against the sell-side consensus on Indian growth story

F&C Investments, a leading investor in emerging markets, has moved significantly overweight in India within its global emerging markets (GEM) portfolios, as earnings continue to be strong and valuations are back to attractive levels.

According to Jeff Chowdhry, head of emerging equities at F&C, India is now one of his team's favourite bets for the next 12 months. "Despite the disappointing performance of the Indian market in recent months, we have remained very positive on the secular outlook for India. Six months ago we were concerned about valuations but these have come down a lot and the market has corrected by 35% since the beginning of the year," he said. "Whereas India was one the most expensive large emerging markets a few months ago, today it's one of the cheapest as well as being one of the most attractive on long-term fundamentals."

Chowdhry points out that the sell-side analysts at brokers and investment banks are almost universally bearish on their outlook for India primarily because of rising inflation and interest rates worries. "This negativity is being reflected in stock prices and creates opportunities for us. Our view is that oil prices are unlikely to continue rising and we expect to see Indian inflation and interest rates toning down over the next 12 months."

The Indian stock market has also been under pressure by huge outflows of foreign money since the beginning of the year. "Our estimates tells us that some $6bn of foreign money has left the Indian market this year but we expect those outflows to slowdown considerably over the next few months, relieving some of that pressure," he added.

F&C's is currently overweighting India by 3% above the benchmark. In order to buy more Indian stocks, Chowdhry's team has sold positions in Malaysia and Korea, countries that are unlikely to outperform under the current global economic environment. The team has also slightly reduced its overweight position in Brazil, its favoured Latin American market.

Currently favoured Indian stocks include Reliance Industries, the largest company in the market and a dominant player in the oil and gas market, and HDFC, the country's largest mortgage lender which provides loans to the country's rapidly rising middle classes.

Chowdhry concluded: "On valuation, the Indian market now sells on a forward price earnings multiple of 12 which is below its 5-year average and below the Global Emerging Market average," Chowdhry explained. "We expect earnings growth of 20% over the next 12 months and therefore, even if the market does not re-rate, the Indian stock market can rise at least 20% from current levels."