Indian inflation should peak this quarter and begin to drop off, although wages will keep rising as the economy grows according to Sanjiv Duggal, the manager of the HSBC GIF India Equity fund.
Duggal says a combination of both would hurt the country’s competitiveness so inflation rolling over will help.
Meanwhile, Duggal is critical of India’s decision to reverse a two-month old rule requiring state-run companies to have at least 25% of their shares in public holdings. Instead, government-owned companies will only need a minimum of 10% public holding in three years, although non-state companies will still need at least 25%.
“We are disappointed with the decision, as a 25% free-float requirement would have meant the divestment of more government interest in state-owned companies,” says Duggal.
“This in turn would have helped to raise more funds to contribute to the reduction of the country’s fiscal deficit.”
Looking at the fund’s current positioning, the manager has maintained a position in State Bank of India, which has started outperforming in the last few months after a slow start to 2010. (article continues below)
“It is one of the government-owned banks that foreign investors can still freely buy,” adds Duggal.
“All of the other banks in the public sector space are at the foreign limit, restricting foreign account buying in the market. State Bank of India’s share price jumped to a record in mid-August, after it posted the highest profit increase in four quarters as accelerating economic growth boosted loan demand and earnings from retail banking. Based on the results, we think State Bank of India should continue to perform relatively well.”
Elsewhere, the team remains positive on the automobiles sector, predicting domestic car demand in India could accelerate to about 20%.
Another overweight position is the power sector, with companies working hard to deal with shortages in the face of urbanisation, rising consumption and the growing demand for white goods.
Jindal Steel & Power is among the portfolio’s top five positions, a merchant power play that receives the market price for the electricity they sell rather than a regulated tariff.