India-based fund managers are growing more confident in the domestic economy and plan to raise allocations to auto makers and private sector lenders, betting that no change to interest rates will underpin an economic recovery, a Reuters poll showed.
The expected allocations for April-June follow the lead of foreign investors who have already been investing in India-focused shares, such as Tata Motors Ltd, since the start of the year. That has sparked a rally in the broader Nifty which climbed to a record high last week and is up 7.5 percent this year.
The confidence in India marks a shift from last year when IT outsourcing firms and drug makers featured among top gainers as investors sought more exposure to the global economy, with economic growth at its weakest pace in a decade.
Sentiment has improved on expectations the Reserve Bank of India will keep interest rates on hold, after tightening policy by three-quarters of a percentage point since September.
Markets also widely expect the opposition Bharatiya Janata Party will win elections concluding in May and spur new private investments, especially in infrastructure.
"We are making a play on the broader economy because as macros improve, rate-sensitives will clearly benefit, and these are all liquid large index constituents that are better placed to capture the improvement in the economy," said Neelesh Surana, Equity head at Mirae Asset Investments in Mumbai.
Thirteen out of 18 fund managers in a survey carried out between April 2-8, said they would increase their holdings in vehicle manufacturers and auto parts makers in the next three months, up from 3 fund managers in a 16-member poll in January.
Auto makers are in the midst of a rally with the NSE auto index up 17.5 percent since the start of February.
An industry body predicted last week that car sales in India would rise this fiscal year after two straight years of decline, albeit only marginally, fuelled by stronger economic expansion and tax cuts under a new government.
Fund managers also plan to increase their holdings in private banks, reflecting confidence the sector is sorting out its troubled loans and will expand their loan books as economic activity picks up.
Ten out of 18 fund managers surveyed said they would raise their allocation in these banks, up from 6 out of 16 in January.
However, analysts warn these bets could be upended by inflation, especially if consumer prices accelerate more than expected, reviving the prospect of interest rate hikes.
Meanwhile, nine of the 18 asset managers would also raise allocations to cement makers and infrastructure companies, being more optimistic about a pick-up in the investment cycle after the elections.
However, valuations could be a concern. Construction material makers are trading at a forward price to earnings multiple of 22.9, according to Thomson Reuters StarMine, compared with a valuation of 15.7 for the Nifty.
By contrast, few investors are willing to increase their allocation on exporters.
Only four of 18 polled planned to increase their allocation to drug makers and none of the respondents said they would buy software makers after last year's rally.
The consumer goods sector, considered a defensive play, saw the smallest number of fund managers planning to increase allocations, the survey showed.
Rising raw material costs have begun to weigh on margins of consumer good makers, while persistently high-inflation has also slowed sales growth in recent quarters.