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SCMP Reporter

INVESTORS with an appetite for risk are being offered a new fund aimed at southern Indian companies.

   The past 12 months have been torrid for those with a stake in the sub-continent as all Hong Kong-authorised funds have posted heavy losses.

   According to Micropal, the statistics company, an investor who 12 months ago invested US$1,000 in the Credit Lyonaisse Indian Subcontinent fund, the best performer, would have lost nearly 40 per cent of their capital.

   The worst performer, Jardine Fleming's India, would have reduced the same amount to $554.

   Recent launches, such as GT Smaller Companies, have lost about five per cent during the past six months.

  Guinness Flight, which this week launched the Madras Indian Equity Fund, is aware of the risks but confident that it has developed the right formula.

   It has formed a joint venture with Madras-based First Leasing to research the local stocks.

   First Leasing's chairman, Farouk Irani, warned that India's company reports can be 'opaque' but said his company's experience of leasing to local companies had given it a good idea of the likely high flyers and turkeys.

   Mr Irani said: 'We know the companies that are paying their rent.'   The fund will focus on medium and small capitalised companies based in the south and west of India.

   Dudley Howard, managing director of Guinness Flight, said: 'Firstly, the stock market valuations of India have fallen 25 per cent from last year's peak leaving stocks cheaply priced by comparison with other Asian markets.

   'Secondly, many of India's larger companies have reported profit increases of 50 per cent this year and more than 25 per cent is expected next year.

   'This has lowered the expected price/earnings multiple of the Indian market for 1995/96 to 11 times, compared with 45 times in 1993, while the earnings per share growth is expected to be at least 25 per cent,' Mr Howard said.

   The attraction of the southern and western regions of the country is the concentration of high technology, pharmaceuticals and transport companies.

   Stocks earmarked for the portfolio include Square D Software, one of the region's largest exporters with earnings per share (eps) growth of 53 per cent which is sitting on a 1995 price/earnings (p/e) ratio of 12 and TVS Suzuki, a market leader in mopeds with eps growth of 48 per cent and a p/e of 15. But even fund companies warn India is a high risk market.

  Cynthia Liu, director of investment services for Jardine Fleming, said: 'It is mind-bogglingly simple to lose a lot of money very quickly in India.'    The government has pressed ahead with a range of reforms and the private sector has seized the opportunity.

   During the past 15 years the number of listed companies has nearly trebled to more than 7,800 while market capitalisation has grown from about US$2 billion to more than $172 billion.

   But the economy has not escaped common emerging market problems of poor liquidity and lax reporting.

  Ms Liu said: 'Most people look at the Bombay index which is only 30 stocks of which the top 10 account for 70 to 75 per cent of the market capitalisation.

   'Obviously if you have a diversified holding it is very difficult to perform in line with the index because your holdings have 60 to 100 stocks. That is why most of the funds have a very poor result because they cannot invest the way the index is.'    She warned: 'If we do not see liquidity return to the market the poor performance may last for a while.'    Adding to the uncertainty has been an 11 per cent devaluation of the currency and elections within the next four months.

   Ms Liu said: 'The currency devaluation is not necessarily bad for equities but what created a lot of concern was that the central bank did not say a word as the rupee fell.'    There is also the prospect of another rise in interest rates by about half a percentage point taking the prime rate to 16.5 per cent.

   'The government is going to have to support the currency, and industrial and economic growth is growing well.

  'But the banks do not have enough money to lend because the government is issuing so much paper.

  'There is a lack of credit,' she said.

  Whether to choose a specialist India fund or regional fund depends on the risk appetite of the individual investor.

  Clearly, the higher the concentration of stocks in any sector or country the greater the potential risk.



Fund to whet your appetite for risk