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Mumbai: India's construction and engineering companies are set to produce the best returns for investors for a third year running as India pours more cash into building roads, airports and power plants, but their popularity has left some stocks with lofty valuations.
The stock market stars of three to eight years ago - technology and software companies like Infosys - will stay out in the cold as they are heavily exposed to a potential recession in the United States.
Analysts and fund managers said a recent stock market slide, which has left the benchmark BSE 30-share index down around 10 per cent this month alone, has helped skim some of the froth from infrastructure stocks.
They say India's builders, power equipment makers and engineers are relatively protected from any US downturn.
Infrastructure boost
This is because the Indian economy is driven mainly by domestic demand, and rising incomes are boosting demand for everything from consumer goods to cars and houses, and companies are building new factories and expanding.
"If 1995-2005 belonged to information technology, then 2005-2015 belongs to infrastructure," said Ved Prakash Chaturvedi, managing director of Tata Mutual Fund, which runs two infrastructure funds worth $1.3 billion.
Infrastructure funds were the best performers for two years in a row, with four of the top 10 funds notching gains of 90 percent in 2007 following a more than 55 per cent jump by six of the top 10 in 2006, data from fund tracking firm Lipper showed, outperforming the main BSE index's 47 per cent rise.
Wide opportunities
"It will be a predominant theme in 2008 also and should outperform the broader market," said R. Rajagopal, chief investment officer at DBS Cholamandalam Asset Management, who oversees $835 million in assets.
The benchmark index is forecast to reach 22,000 points by end-2008, a Reuters poll showed in early December, up about a quarter from current levels.
Investments in construction and engineering companies by diversified equity funds almost doubled to $19 billion in 2007 and made up more than half their total equity assets of $37.5 billion, said fund tracking firm ICRA Online Ltd.
The government has said that India needs to invest $500 billion over the next five years to build infrastructure to help sustain an economy that is expanding at about 9 per cent annually.
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