IndiaÆs chance to overtake China

China and India û known as Chindia by some û have been closely associated with each other in recent years. Both boast strong consumption demand, have among the fastest growing economies in the region, and have been competing for the attention of portfolio investors looking for the next big investment story.

However, concerns over ChinaÆs share price valuations, overheating economy and rising inflation are causing investors to second-guess their long-standing bullish projections for that market. India is benefiting amid the uncertainty.

An increasing number of fund managers are turning bullish on India, which is among their strongest overweight positions in Asia. In some cases, this newfound confidence is directly at the expense of China.

IndiaÆs stock market scaled new highs in 2007, with the benchmark Bombay Stock Exchange's Sensitive Index, or Sensex, closing the year above the 20,000 mark. The Sensex ended 2007 at 20,287, gaining in excess of 47% for the year. Rate cuts initiated by the US Federal Reserve brought record foreign investment inflows totalling around $17 billion to the market last year.

ôWhile Indian equities have soared because of abundant foreign liquidity, it is our belief that the majority of foreign institutional interest continues to remain in the larger capitalised companies, and therefore there is relative under-ownership of mid-cap companies,ö says Nitin Jain, Dubai-based head of long-only equity strategy at asset management company Kotak Mahindra UK.

ôForeign interest for Indian equities is likely to be sustained this year as corporate earnings are expected to remain strong and India emerges as one of the few economies with a resilient growth model. We expect domestic liquidity, lead by insurance companies, to be a dominant source of liquidity from this year onwards,ö Jain adds.

In 2007, stock funds in India delivered the best return in four years, with more than three-quarters of the diversified equity funds in India outperforming the benchmark BSE Sensex in 2007, notes Dhruva Raj Chatterji, a Mumbai-based research analyst at Lipper. Funds with higher exposure to capital goods, real estate, metals, banking, and mid- and small-cap stocks outperformed last year.

ôIndiaÆs growth story is on track and has a long way to go,ö says Paul Chan, Asia ex-Japan chief investment officer at Invesco Hong Kong, noting that investments, consumption and outsourcing are among that marketÆs key drivers.

Investments have been boosted by companiesÆ capital expenditure, which in turn has been helped by high capacity utilisation levels and free cash flows. Infrastructure investments, meanwhile, have been supported by government policies and both private and public initiatives.

Robust consumption is due in large part to strong growth in urban areas due to the boom in IndiaÆs services industry and outsourcing opportunities. Retail lending is still at a nascent stage and offers a major growth potential.

Further inroads are taking place, meanwhile, in the skilled and high-end functions in finance and biotechnology.

Mark Matthews, Singapore-based chief Asia equity strategist at Merrill Lynch, expects IndiaÆs stock market to be among this yearÆs outperformers, but he doesnÆt expect it to perform as well as it did last year. Valuations are relatively steep, after all, and the market has a tendency of becoming crowded now that demand from portfolio investors is on the rise.

ôItÆs very hard to find good value in India,ö says Matthews, adding thatÆs the challenge fund managers have to face at this juncture. He notes that commodities are among the best bets in that market, as are oil and gas companies.

Kotak MahindraÆs Jain looks for opportunities among a broad range of stocks in India, from small-caps to large-caps. æWith more than 5,500 listed entities in Indian exchanges, there is no dearth of companies to invest in,ö he says.

While there are close to 200 companies above $1 billion in market capitalisation, there are around 900 companies with market capitalisations in the range of $50 million to $1 billion. ôWe look into this entire universe of about 1,000 companies for investment opportunities,ö Jain says.

India is also among the major investment themes of Motoji Fukuyama, Hong Kong-based investment manager for the Pacific regional group of JF Asset Management. Around 18% of the JF Asia Domestic Opportunities Fund that he manages is invested in India, although the portfolio does have one-third of its assets in China.

ôIndiaÆs growth remains robust both at the macroeconomy and company levels,ö says Fukuyama, noting that both India and China reported better-than-expected third-quarter GDP growth rates. ôMajority of Indian companies are operating in a healthy environment evidenced by strengthening balance sheets and earnings upgrades.ö

Wireless telecommunications services Bharti Airtel; commercial bank ICICI Bank; oil, gas and consumable fuel company Reliance Industries; and thrifts and mortgage finance company Housing Development Finance Corporation are among the Indian stocks in FukuyamaÆs fund.