POLL - MFs see stocks rising; eye financials, energy

Indian shares, which touched a 25-month high on Monday, could rise further in the June quarter with financials and energy stocks finding favour among domestic fund managers, a Reuters poll has shown.

Five of the nine respondents to a Reuters Asset Allocation Poll conducted between March 23 and March 30 said India's benchmark stock index could rise further in the next three months. Two said the index could rise more than 5 percent.

Foreign funds have pumped around $3.9 billion in Indian shares this year, most of it in March, helping the BSE Sensex rise by about 7 percent in the current month.

"The (FII) flows are too strong, there is risk appetite and the concerns regarding sovereign debt are not so high," said David Pezarkar, head of equity at Shinsei's Indian mutual fund unit.

"There will be bouts - but I don't think that is going to change the underlying trend."

Five fund managers said the BSE Sensex, which currently trades at one-year forward price to earnings multiple of around 17 times, is fairly valued, while three said it was overvalued.

Four fund managers said they would decrease the cash levels in their portfolios, whereas three said they would sell equities.

Overall, nearly 7 percent of assets under India's equity diversified funds were held as cash at February end, data from fund tracker ICRA Online showed.

Though five managers are of the view that market would continue its northward journey, some believe it could fall in the next quarter.

A further rise in the equity markets could give way to profit booking opportunities, Tridib Pathak, director equity at IDFC Asset Management, said.


SECTORAL PICKS

Most fund managers are optimistic about the financial services space, which accounted for 18 percent of diversified equity fund assets in February, their biggest sectoral bet.

Six respondents said they would scale up exposure in the sector while two said they would maintain their current exposure.

The Reserve Bank of India (RBI) surprised markets by raising its key lending and borrowing rates by 25 bps on March 19. However, bankers said last week that Indian banks see stable lending rates and profits in the near term despite RBI's recent move.

The energy sector, which is the second most preferred space, would also be in focus with five fund managers looking at further increasing their allocation.

A recovering Indian economy might also prompt money managers to raise exposure to basic engineering sector, which controlled more than one tenth of diversified equity assets in February.

Five fund managers said they would increase investments in the sector while four would retain exposure, the poll showed.

Three of the poll respondents said they would increase their allocation to shares of construction companies, while four said they would maintain their holdings.

If targets have to be met, the country would require accelerated spending on infrastructure, which should benefit the construction space, said Sanjay Sinha, chief executive at L&T Mutual Fund.

"The outlook for the 12th five year plan to spend $1 trillion on infrastructure is an even bigger space," he added.

However, autos, consumer non-durables and healthcare stocks could face some selling pressure in the next three months, the poll showed.

Balanced fund managers, those who invest in both stocks and bonds, are also looking at reducing their allocation to cash.

Feb manufacturing growth at 20-month high - PMI

India's manufacturing industry in February grew at its fastest pace in 20 months, expanding for the third month thanks to expanding output and new orders, a survey showed.

The HSBC Purchasing Managers' Index (PMI), based on a survey of 500 companies, rose to 58.5 in February, its strongest reading since June 2008, from 57.7 in January.

A reading above 50 means activity is expanding.

"At 58.5, the headline index is consistent with ongoing double-digit gains in industrial production which in turn is likely to mean that spare capacity is being eaten into rapidly," said Robert Prior-Wandesforde, Senior Asian Economist at HSBC.

"Although the output prices balance surprisingly dropped back in February, while remaining consistent with price gains, there is more and more evidence of emerging supply-side constraints in labour and product markets."

The new orders index rose to 64.0 from January's 62.9.

"While new export orders grew less strongly in February than January this didn't prevent the overall new orders series from hitting a high in the current upturn," said Prior-Wandesforde. "The same was also true of output growth, which has rarely shown such strength since the series began in April 2005."

In the 2010/11 federal budget released on Friday, the government said it expected Asia's third-biggest economy to grow faster than the 7.2 percent it forecast for this fiscal year ending on March 31. It sees growth accelerating to 8.5 percent in the 2010/11 fiscal year.