Indian stocks, up 40 percent this year, have the potential to deliver more double-digit returns in coming years as consumers spend more and firms invest in additional equipment to increase sales, a fund manager said.
"One can expect a 20 percent return each year in the medium term and anything beyond that will be a bonanza," P G R Prasad, managing director at SBI Mutual Fund, told Reuters on Monday, noting that by medium term he meant about three years.
Around $10.5 billion in foreign money has flowed into Indian stocks this year, up 20 percent from last year, mainly on expectations the economy will grow 7-7.5 percent in the year to March 2006 and show similar growth for the next three years. Prasad said his top picks for 2006 would come mainly from infrastructure, vehicle-parts makers, software services, textiles and pharmaceutical.
He declined to comment on individual stocks but companies in those sectors that have done well this year include construction firm Larsen and Toubro Ltd and drug maker Cipla Ltd.
"Anything connected with infrastructure like construction will flourish," Prasad said. "The world is dependent on India in a big way in newly emerging sectors like automobile ancillaries (parts makers)."
India, Asia's third-largest economy and home to more than a billion people, has embarked on an extensive drive to rejuvenate rundown roads, ports and airports, acknowledging that its worn-out infrastructure is a big drag on the economy.
Housing is also booming as low financing costs and rising salaries fuel demand for quality.
As more and more foreign companies move operations to India to take advantage of low wages and technical know-how, Indian firms are enjoying rising domestic demand for cars, clothing and other consumer goods.
"There is a consuming audience because 60 percent of the population is below 49 years of age with enough disposable income to consume anything - and banks are in attendance to give loans. You can imagine the kind of self-sustaining economy India is."
As well as foreign investors, Prasad said the market was seeing increasing investment by Indian funds. He saw any reversal in the market as a temporary correction.
SBI Asset Management, 65 percent owned by top commercial bank State Bank of India and the rest by France's Societe Generale, has seen its equity assets under management almost quadruple to 61.3 billion rupees ($1.4 billion) in the past year, as rising stock prices attract more investors. The spoiler to the party could be high oil prices as India imports 70 percent of its crude needs.
With oil hovering around $60 a barrel the import bill for Asia's third-largest consumer is seen hitting $33 billion in 2005/06, up a quarter from the previous year's $26.6 billion.