Biggest bull may ask clients to cash out

CONFLICTING SIGNALS ON THE INDIAN MARKET

India's biggest bull is on the verge of becoming its biggest bear. Sanjiv Duggal, who manages the world's largest holding of Indian equities, may even urge his clients to cash out.

"Investors aren't factoring in earnings and news flows, but valuing people's dreams," said Duggal, 43, who oversees about $11 billion in Indian equities as investment director at HSBC Holdings Plc's Halbis Capital Management in Singapore.

"The risk-reward ratio is not favorable." Indian equities are valued at an average of 23.6 times estimated earnings, compared with Hong Kong's Hang Seng Index at 20.2 times and Korea's Kospi index at 14.6 times. The Standard & Poor's 500 Index is valued at 15.9 times profit.

Duggal's Luxembourg-based $8.5 billion Indian Equity Fund, which targets overseas investors, has had a total return of 63 per cent this year.

It is the second-best performance among 15 offshore equity funds with more than $1 billion in assets that invest in India, according to data compiled by Bloomberg.

India's Sensitive Index has fallen 1 per cent since passing 20,000 for the first time on October 29, the day Duggal turned pessimistic. It rose 0.3 per cent to 19,795.87 on Thursday. He has not yet told his investors of his change of heart.

The Sensex has doubled in less than two years and is Asia's third-best performer in 2007, after China and Bangladesh. "The market is pricing in a lot of growth for the next two to three years," Duggal said.

Power equipment manufacturers, for example, are seeing revenue growth of 25-30 per cent a year and their stock prices assume the rate will continue, he said. But government projections of power generation by 2020 imply a growth rate of less than 10 per cent.

Duggal said he is considering inviting investors to take some of their money out of the fund and seek better-valued equities elsewhere. He expects Indian stocks to decline over the next 18-24 months.