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Alliance Capital is bullish on Indian equities

Mutual fund major Alliance Capital Management, with $3.5 billion invested in emerging markets, is overweight in only two Asian markets.

One is South Korea, no surprise. The other is India, a big surprise.

"From a global or Asian perspective, we are very bullish on India," said Samir Arora, head of Asian emerging markets for Alliance Capital.

"On a bottom-up basis, Indian companies are very good."

Bottom-up refers to picking stocks based on company fundamentals like revenue and profit growth. That investment style contrasts with a top-down approach, which emphasises macro-economic and sectoral factors, looking for stocks expected to be the best performers in fast-growing markets or sectors.

Because of its gaping fiscal deficit and stuttering progress in economic reform, Arora said India's top-down story discourages many foreign investors.

Alliance Capital, owned by New York Stock Exchange-listed Alliance Capital Management Holding LP, had total assets under management of $412 billion at the end of June.

Arora said 14 per cent of the Asian emerging market portfolio is composed of Indian stocks, twice the seven per cent weighting for India in the MSCI Emerging Asian Markets Index.

Some 45 per cent was ploughed into Korean stocks, slightly more than that market's 40 per cent MSCI index weighting, while 16 per cent was invested in Taiwanese stocks, well below that country's 25 per cent weighting, Arora said.

Only 8 per cent was invested in Chinese stocks, six per cent in Malaysian and 2.5 per cent or less in Thai, Indonesian and Philippine stocks.

Low valuations

Alliance is bullish on India partly because valuations are low. The average price-earnings ratio of the 30 stocks in the benchmark index stood at 11.3 on August 1, compared with 13 for the Singapore index, 16.6 for Hong Kong's Hang Seng index, 25.4 for the Taiwan marker and 32.2 for China, according to Thomson Financial Datastream.

Arora believes the Indian market has lofty upside potential once domestic investors resume buying.

"India has not seen any domestic participation in the market (the past year). In fact, the domestic flow has been negative."

Arora also said 98 per cent of the new money pumped into Indian mutual funds in the past year to March went into fixed-income funds, drawn by the 20 per cent-plus rates of return posted by bond funds.

Alliance Capital manages about $750 million in Indian domestic mutual funds, two-thirds spread over seven fixed-income funds and $250 million in five equity funds.

Techs, autos, oil

The composition of Alliance's largest stock fund, the 4.8- billion-rupee Alliance Equity Fund, shows Alliance is particularly keen on three sectors -- technology, autos and oil and gas.

Some 23 per cent is invested in tech stocks, including Digital GlobalSoft, the fund's single-largest holding.

Three of the 10 top holdings are auto sector stocks - motorcycle makers Hero Honda and Bajaj Auto and Tata Engineering & Locomotive Co, India's largest truck maker.

"Auto stocks we feel have become the new growth sector," said Arora, echoing the outlook of auto analysts who expect motorcycle sales to grow 20 per cent annually for years to come.

Arora is also bullish on state-run oil and gas companies because they are the most attractive assets the government could sell to raise money needed to reduce the fiscal deficit and finance vital public works projects.

"If privatisation occurs, it will happen in the oil and gas sector, where big companies will attract lots of foreign buying interest," he said.

"I also like the BPO (business process outsourcing) sector but there are not many listed companies."

Alliance has acquired a nearly five per cent stake in Hinduja TMT, an IT-enabled services provider and another of the fund's top 10 holdings.

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