A broker laughs while speaking to a colleague as they trade on their computer terminals at a brokerage firm in Mumbai. The Sensex’s valuation of 15.4 times projected 12-month earnings is about 30% higher than the MSCI Emerging Markets Index.
Bloomberg/Mumbai
Infina Finance, a Mumbai-based $190mn hedge fund, has turned the most bearish in a year on India’s stock market and will short if it rallies further.
“Right now we have the lowest net longs than we had in the last 12 months,” Venkat Subramanian, Infina chief executive officer, said in an interview. “If the market goes up any further, I would become net short.”
The long-short equity fund, which counts billionaire Uday Kotak and Kotak Mahindra Bank among investors, is expecting a correction as foreigners allocate money to other regions and stock valuations become expensive. Indian equities have rallied as Prime Minister Narendra Modi pledged to revive investments and manufacturing while curbing graft after being swept into office a year ago. The economy grew by 7.5% in the January-March period, faster than the previous quarter’s 6.6% rate.
“Current market sentiment is very bullish, but it is possible that earnings expectations won’t be met” as it will take at least another 15 months before the government’s actions can bolster company earnings, Subramanian said.
“Companies in consumer goods, telecommunication services and auto-components could be the space where significant disappointments could happen.”
The fund, which has the capacity to use leverage though it’s not employing it, has returned about 16% every year since its inception in 2008, according to Subramanian.
Earnings for companies in the benchmark S&P BSE Sensex Index are estimated to grow about 31% in fiscal 2016. That compares with about 13% for those in the MSCI Emerging Markets Index. The Sensex’s valuation of 15.4 times projected 12-month earnings is about 30% higher than the MSCI Emerging Markets Index. The benchmark closed 0.9% higher at 28,020.87 points. It has added 1.9% this year.
“Things are improving on the domestic front as this government has started doing things which will start showing up in company earnings in 15 to 18 months,” Subramanian said. “But the market has already paid for all of it and that too with foreign money.”
Foreigners have invested $6.3bn in Indian equities this year compared with $9.9bn in the first six months of 2014. Overseas fund managers bought stocks and bonds worth an unprecedented $42bn last year, data compiled by Bloomberg show.
The fund, which is currently managed by a five-member team that includes three analysts and a dealer, is branching out into private equity and plans to invest in sectors such as food processing, information technology and engineering-related startups.
Infina is setting up a subsidiary in Dubai to invest in overseas markets, especially in US equities. The unit, in which Infina will initially invest Rs2bn ($31mn), is awaiting approval from the country’s central bank.
