Niche Info Online Business

Philip Scott, This is Money
29 October 2007

Indian stocks soared to an all-new new high as the nation's main index, the Sensex, rocketed to more than 20,000 points this week as foreign investors ploughed cash in.

The Sensex, which is comprised of India's 30 largest companies, gained 3.8% to close at 19,977.97, after reaching a record high of 20,024.87 points earlier on Monday.

Already this year foreign investors have injected some $18bn into Indian equities, driving the index up almost 40% and experts are forecasting more growth.

Earlier in the month, the Indian Government announced it was taking measures from 25 October to monitor anonymous foreign investing which, although it caused some initial market concern, has been welcomed by experts as an extra layer of regulation which should ultimately protect investors. The chief worry is that foreign investors could withdraw large amounts of cash from the Indian market, which could subsequently lead to a sharp slump in equity prices.

Arun Mehra, manager of the Fidelity India Focus fund said: 'India is changing and new themes are emerging all the time. For example, huge gas and oil fields have been found recently on the East coast which will have an impact on the rupee and imports. Lifestyles are changing, more people are using the internet and thinking about healthcare. Property development is also increasing.'

One of the biggest drivers of growth is the changing demographics. Wealth is increasingly filtering down to rural and traditionally low-income sections of society, and India's middle class now totals 200m and this is expected to swell to 500m over the next eight years. The gross domestic product (GDP) of India has enjoyed phenomenal growth from some £16bn in 1980 to a whopping £500bn today.

In addition it also has one of the youngest populations in the world, with around half aged below 26. Experts point out that lifestyles are changing too with a growing number of people using credit cards, buying mobile phones, eating out, shopping in big department stores and spending their money on healthcare, travel and luxuries. Over the coming three years some 71m will join the working age demographic.

'What we have taken for granted for years in the UK is now unfolding in India. Purchasing power is starting to come through and households are moving up the income chain,' adds Mehra.

'Another big issue in India is infrastructure. While India is ahead of China - the other big powerhouse in Asia - in terms of its service industry, it is at least 10 years behind with infrastructure development. However, this is starting to change and $320bn of infrastructure investment has been targeted between now and 2012 with projects in place for improving roads, ports, telecommunications, airports, railways and power.'

Justin Urquhart Stewart of Seven Investment Management is however urging caution as he believes many investors in India suffer from a 'highly inflated expectation on returns'.

He says: 'The global economy is slowing down and emerging markets, especially those that have been doing so well, will inevitably be hit. There is a huge amount of speculation, but this is a very volatile region. Right now India looks like a terrible fashion fad. There needs to be a reduction in valuations to more realistic levels.'

Volatility no doubt dogs the Indian market. In 2006, when markets around the globe tumbled in May and June, the Indian Sensex index plummeted by nearly 30% in just five weeks. Following the Government's recent legislation on foreign investors, shares fell by 10%, although they managed to recover to just 1.7% down by the end of trading on the same day.

There is a limited selection of pure India funds but some of the growth has been exceptional. Mark Dampier of Hargreaves Lansdown, an independent financial adviser, likes the HSBC GIF Indian Equity fund. Launched in 1996 it has achieved a phenomenal return of 1,514% since then, according to fund analyst Morningstar.

Darius McDermott of Chelsea Financial Services, another adviser, likes Fidelity India Focus - up 250% since it launched in August 2004 - and First State's India portfolio, which has posted a return of 45% since its inception a year ago.

Neptune is one of the latest fund managers to get in on the India game. The group launched its India fund at the end of December last year and since then it has delivered growth of 31%. JPMorgan's Indian investment trust has delivered 735% over the past five years.

McDermott says: 'While India has a very good long-term story, this is for high risk investors only, but there have been some excellent returns from India funds, particularly over recent years.'

Another way in is to buy a generalist emerging markets fund which invests in a spread of regions. Gavin Haynes of Whitechurch Securities recommends First State Global Emerging Markets Leaders, Baillie Gifford Emerging markets and JPMorgan Emerging Markets for investors who prefer this route.