India's Sensex May Exceed 10,000 on Stock Buying From Overseas

India's Sensex index is approaching 10,000 for the first time. Demand from overseas investors for the country's stocks may push the benchmark over the top.
Investors based outside India bought a record $10.7 billion more stock than they sold last year, according to the Securities and Exchange Board. Merrill Lynch Investment Managers Co. and JP Morgan Fleming Asset Management Ltd. introduced India-dedicated funds in Japan last month.

``Not even half the money that wants to enter the Indian markets has come in yet,'' said Jon Thorn, an investor based in Hong Kong. His $200 million India Capital Fund was honored as the best-performing single country fund at the AsiaHedge awards last year. ``Lots of investors are waiting on the sidelines.''

The Sensex, as the Mumbai Stock Exchange's Sensitive Index is known, increased 2.6 percent last week to 9640.29. The gain followed a 42 percent advance in 2005, when the benchmark was the third-best performer in Asia.

Investors are betting that growth in corporate investment will benefit companies including Larsen & Toubro Ltd., India's biggest engineering firm. At the same time, increased consumer spending may bolster companies such as Bajaj Auto Ltd., the nation's second-biggest maker of scooters and motorcycles.

During the past three years, the Sensex almost tripled. The benchmark was Asia's second-best performer in the period, behind only Pakistan's Karachi Stock Exchange 100 Index.

10 Percent Growth?
The Sensex's advance last week trailed a 4.6 percent rally in Morgan Stanley Capital International's Asia Pacific Index, the biggest in five months. In 2005, the Indian index jumped twice as much as the regional gauge and exceeded a 30 percent gain in MSCI's Emerging Markets Index.

International investors have been drawn to India as the country delivered the second-fastest pace of growth among the world's 20 biggest economies. The $661 billion economy expanded 6.9 percent in the year ended in March 2005 and 8 percent in the next two quarters. China was first with 9 percent-plus growth.

The economy will probably grow at a 7.5 percent annual pace during the next four years and a 10 percent rate is ``eminently feasible,'' Prime Minister Manmohan Singh said at the India Economic Summit in New Delhi in November.

``With India's economy showing no signs of slowing down, we're very optimistic about the prospects for Indian stocks,'' said Yukio Arai, a manager of the Mitsubishi UFJ Deutsche India Stock Fund in Tokyo. ``There's good reason to believe that the Sensex can easily top 10,000.''

`Won't Be Selling'
Many Japanese investors share his view. Seven India funds have opened since September 2004, when PCA Asset Management Co., a Tokyo-based unit of the U.K.'s Prudential Plc, introduced the Indian Equity Open fund. Assets have surged to 427 billion yen. PCA's fund had 1.97 billion yen at inception.

Merrill, the biggest U.S. securities firm, raised 89.3 billion yen last month for its Merrill Lynch India Stock Fund, sold in Japan. JPMorgan, the third-largest U.S. bank, raised 717 million yen for its JF Indian Stock Active Open fund.

Nomura Asset Management Co., Japan's largest mutual-fund company, raised 50 billion yen in its India Stock Investment Fund last June. The fund more than doubled its assets in six months. Mitsubishi UFJ's fund has 7.42 billion yen in assets.
Local investors are contributing to the market's gains as well. Domestic funds turned net buyers last year by purchasing $2.4 billion in shares after dumping $269 million in 2004, the Securities and Exchange Board's figures show.

``I won't be selling Indian stocks as long as the money flows into the markets,'' said Mihir Vora, who oversees $452 million as the head of equities at ABN Amro Asset Management (India) Ltd. in Mumbai.

Government Spending
Larsen & Toubro's shares surged 88 percent last year for the Sensex's biggest gain. The Mumbai-based company and rivals such as Bharat Heavy Electricals Ltd. are winning orders as the government spends $37 billion on roads in the next seven years. New Delhi-based Bharat Heavy, India's biggest producer of power equipment, climbed 80 percent for the second-best performance.

Bajaj Auto, based in Pune, India, rose 77 percent in 2005 as the economic expansion spurred demand. India is the world's second-largest market for the company's vehicles.
Some investors and analysts said the rally won't last. Indian stocks have become relatively expensive by emerging- market standards, and cost increases may curb earnings growth.
``The Indian market is overvalued by 30 percent,'' Ratnesh Kumar, head of research and strategy of Citigroup's Smith Barney unit in Mumbai, wrote in a Dec. 14 note to clients. The Sensex will fall to 8,500 by the end of 2006, he predicted, a 12 percent drop from its current level.

Slowing Profit Growth
Shares of companies in the Sensex trade at an average of 17.6 times forecast earnings, exceeding the MSCI's Emerging Markets Index ratio of 12.8 times.
Earnings growth for index members will probably decline to 16 percent this year from a 25 percent average in the past four years amid higher raw-material prices, according to Kumar.

For the Sensex to keep rising, the government must jump- start asset sales and implement economic policy changes it has kept on hold since coming to power in May 2004, investors such as Pauli Laursen said. Opposition from leftist allies has stymied efforts to implement changes.

``The problem with the Indian market is that the reform process has gone dead,'' said Laursen, who helps manage $600 million of assets in emerging markets, including India, at Sydinvest Asset Management in Aabenraa, Denmark.

Stalled Asset Sales
The government is keeping stakes in companies such as Videsh Sanchar Nigam Ltd., the country's largest long-distance phone company, and CMC Ltd. a software developer. Plans to raise a limit on overseas holdings in insurers to 49 percent from 26 percent are in abeyance.

Yet money still pours into the stock market from overseas investors. They bought a net $521.5 million in shares during the first week of 2006 more than double the $206.3 million bought in the same period last year.

``The chances of the Sensex hitting 10,000 are quite high,'' said Ashish Goyal, the Hong Kong-based manager of the PCA fund. ``We are confident of the pace of economic growth.''