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India’s tech summer

A value manager of my acquaintance tells me he attended a client meeting recently to be told that the client was reassured to see he hadn't outperformed last year. He assured her he would keep up the good work.
For growth investors, the pressures are of a different kind. The dramatic outperformance of so-called TMT stocks, notwithstanding the recent correction, raises some important issues for fund managers. In their desperation to participate in the tech rally and boost their numbers, what actually happens is they just add to the divergence in sector performances by selling the old economy stocks in favour of the new. This exaggerates the overall valuation effect and unnerves seasoned commentators who argue, from bitter experience, that the move must ultimately be unsustainable.
And so it proves; the rubber band always snaps back. But not for long it seems, because despite March’s sharp upswing for the Dow, there has not been a return to old-fashioned values. In fact, what is painfully clear is that the majority of investors have decided to favour the new economic model, and this is what is still driving stock prices.
Technology, in its broadest sense, is now more of a compelling buy opportunity than ever. Some degree of realism has been brought to valuations but judicious stock picking is still crucial. For pooled fund investors, up until recently, the universe of sector funds has been limited. Most funds have had a global focus and many have concentrated on traditional areas like natural resources. Now there are an increasing number of specialist technology sub-sector funds and country and regional funds being launched.
A truly global technology portfolio might, for example, include the Asia iTech fund and one or more of the funds focusing on India’s phenomenal tech industry. The Indian stock market, with its increasing focus on technology, has been a major beneficiary of technology as a global growth play.
Listings on Nasdaq have caused several Indian stocks to re-rate sharply higher, most notably Infosys Technologies and Satyam Infoway.
The shift in perception of Indian companies up the value-added scale is seen as ample justification of these higher valuations. In his book, ‘The New New Thing’, Michael Lewis quotes Netscape founder Jim Clark as a big fan of Indian technical talent: “They are the most talented engineers in Silicon Valley, and they work their butts off”.
India's IT sector is increasingly appearing on the radar screens of international investors. The country's rapid progress towards paperless trading (which now accounts for over 90% of trades in value terms) combined with strong and sustained inflows into domestic mutual equity funds and a more stable political situation have all contributed towards a better operating environment. The consensus is that current valuations are underpinned by these factors and also by the improving fundamentals, such as lower inflation, a more favourable trade balance and higher industrial production.
Both IT and pharmaceutical companies are benefiting from a greater realisation by international investors that Indian companies offer quality as well as competitive advantage. The ‘hope factor’ is not something India’s tech companies are prone to, because many of them are involved at the infrastructure end of the business and, what’s more, they're producing earnings.
Quality India fund specialists include The India IT Fund, managed by the Unit Trust of India, which has recently open-ended. It concentrates on the larger stocks and has been a tremendous performer over the last 18 months.
A fund with more of a focus on the smaller growth companies is Arisaig India, managed by Arisaig Partners. The fund currently has a 55% tech weighting. Another sound recommendation is HSBC's Indian Equity Fund. Any of these funds will provide exposure to the very talent that Jim Clark was talking about.

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