India's Stock Market to Gain From `Wealth Transfer,' Reliance Capital Says

India’s stocks, the best performers among the world’s 10 biggest markets, will extend gains amid the “biggest wealth transfer” from developed-nation equities, according to the country’s largest money manager said.

The Group of Seven nations will generate less than 50 percent of the world’s economy by 2012, from about 70 percent in the mid-1980s, based on International Monetary Fund data compiled by Bloomberg. Overseas investment into Indian stocks increased 68 percent this year to a record, according to the market regulator, helping to drive the 15 percent rally in the Bombay Stock Exchange’s Sensitive Index or Sensex.

“The Indian economy is going to quadruple in the next 10 to 12 years and money will find its way” in the “biggest wealth transfer in history,” said Sunil Singhania, head of equities at Reliance Capital Asset Management Ltd., which manages $32 billion in assets. “You have one block that is growing at 6 percent with an appreciating currency and the other struggling to grow at 2 percent with a depreciating currency.”

Emerging-market stock mutual funds attracted more than $60 billion this year as benchmark interest rates near zero percent in the U.S. and Japan lifted demand for higher-yielding assets, data compiled by Cambridge, Massachusetts-based research firm EPFR Global show. U.S. stock funds had outflows of $71 billion, according to Investment Company Institute data.

‘Younger Generation’

“Demographics are in favor of India,” Singhania, 43, whose Reliance Growth Fund is India’s best performer over the past decade, said in an interview in Goa, India on Oct. 23. “Whenever a person ages, the business and wealth gets transferred to the younger generation. If you take the world as a family, the same thing is going to happen.”

Developing nations will expand 6.4 percent next year as advanced countries grow 2.2 percent, according to forecasts this month from the Washington-based International Monetary Fund. India’s gross domestic product expanded 8.8 percent in the quarter ended June, Brazil grew 9 percent in the first quarter, the fastest pace in 15 years, while China expanded 9.6 percent in the third quarter.

The U.S., the world’s biggest economy, makes up 29 percent of the global stock market capitalization and has gained 5 percent this year, according to data compiled by Bloomberg. The BRIC nations, which include Brazil, Russia, India and China, account for about 15 percent of the world’s $49.6 trillion market value. India’s capitalization increased 26 percent, while China climbed 12 percent this year, the data showed.

Valuations

The rally drove the Sensex’s valuations to 19.1 times estimated earnings, the most expensive in Asia and among the world’s 20 largest markets, data compiled by Bloomberg show.

The Indian market is “relatively expensive” based on estimated earnings, Mark Mobius, who oversees about $34 billion as executive chairman of Templeton Asset Management Ltd., said on Sept. 29 in Istanbul. Billionaire investor Rakesh Jhunjhunwala, named by Forbes magazine as the Warren Buffett of India, said last month he’s “cautious” on the Indian market in the short term, though he still expects a “multiyear” rally.

For Reliance’s Singhania, the returns from equities reflect the nation’s earnings growth of at least 15 percent per annum over the next few years.

“For a one-month investor, the valuations are not cheap,” Singhania said. “If you look from a global investor’s perspective, who wants to invest in India for four or five years, we don’t think the valuations are too expensive. India is commanding a premium for growth and a strong domestic economy.”

Reliance is betting on shares of drugmakers, capital goods and infrastructure companies to beat the benchmark indexes, declining to name specific shares. Indian drugmakers will gain as more overseas companies outsource manufacturing. His biggest fund holds shares of Lupin Ltd. and Divi’s Laboratories Ltd., according to data compiled by Bloomberg.

“Global investors are feeling that if something untoward were to happen to the global economy, India would still stand out,” said Singhania, whose company also manages $500 million for foreign funds. “We have performed even in the worst financial crisis.”