Andrew Swan, who manages about $3 billion as the head of Asian equities for the world's biggest money manager, told the Reuters Global Investment 2013 Outlook Summit on Friday that Indian politicians will push reforms and economic growth will tick up.
Swan's view on India comes amid growing pressure on the Indian government to kickstart an economy that is poised to register its worst annual growth in a decade.
"India is underinvested and over-consuming," said Hong Kong-based Swan, who sees government reforms aimed at rebalancing that situation.
"Effectively they've tried to carpet-bomb the market with dozens of reforms. There's no chance that all of them will stick but they're hoping that some of them will stick," said Swan. He spoke at the Summit ahead of the release of the GDP data.
His BGF Asian Dragon Fund invested 9.3 percent of its assets in India at the end of October, up from 5.9 percent at June-end, data from global fund tracker Lipper showed.
Despite a rocky political environment, investors, who found themselves underweight India at the start of the year, have looked past a slowing economy and pushed the Nifty up 26.8 percent this year, making it one of Asia's top-performing equity markets. Yet valuations are a far cry from the market's peak.
The MSCI India index currently trades at 13.3 times forward 12-month price-to-earnings ratio, 43 percent below its five-year high, according to Thomson Reuters I/B/E/S.
Swan said the implementation of a goods and services tax, which could add up to 1-1.5 percentage points to India's GDP, and setting up of the national investment board to fast-track pending investment projects remain key.
"If they can push some of these reforms through you're going to see signs of growth picking up again and that's going to start looking attractive in what will continue to be a low-growth world," he said.
The fund manager, who is overweight China, said he was wary of consumer stocks, both in India and Southeast Asia, as they traded at the higher end of their historic valuations.
Investors have piled into Indian consumer stocks, as government subsidies supported incomes and helped consumption levels stay high at the expense of financials.
Swan picked cheap financial and infrastructure shares, rather than consumer-related sectors, as the best way to play the potential reforms in India which should be aimed at lifting investment and curbing consumption.
He counted Housing Development Finance Corporation in the top-10 picks of the BGF Asian Dragon Fund as of the end of September.
The fund returned 16.5 percent through the end of October, outperforming its benchmark index's 15.5 percent return.
SE ASIA TO CORRECT
The Australian, who is underweight on Malaysia and neutral on Southeast Asia, said the region had an important place in long-term portfolios but shares could fall in the near-term given expensive valuations and as India and China stabilize.
He said one trend worth keeping an eye on is the strong insider selling in Southeast Asian markets, which indicated a peaking of the market for the near term.
Indonesia, at 3.1 times price-to-book value, is Asia's most expensive equity market on that basis, followed by Philippines and Thailand, according to Thomson Reuters Starmine. Asia trades at 1.4 times and China at 1.6 times.
"There is a very, very strong structural story down there, but near-term and tactically, they have done well and may be due for a correction, particularly if China attracts more money," he said.