Focusing on India’s ‘sweet spot’

Shyam Kumar is certainly not disappointed by the news from his home state: it has started to rain.

“Kerala is the first state in India to see the Monsoon and as 60 to 70 per cent of the country’s population depends on agriculture, the Monsoon is always an important factor,” explains Mr Kumar, chief executive of the international arm of Indian investment house Kotak Mahindra.

While GDP is not necessarily adversely affected if the rains do not come on time, it can lead to discomfort among politicians and market players, says Mr Kumar, who is in charge of 60 staff organising distribution agreements for Kotak’s family of India-focused funds from offices in Singapore, Dubai and London.

Water pouring from the heavens is an extra factor to boost what Mr Kumar lauds as a healthy developing market, although he suggests the combination of controlled inflation and falling budget deficit may have been achieved “by default rather than by design”.

“Things are now looking good for the Indian market,” says Mr Kumar. “But we need to distinguish between the real and market economy. The real economy is in a good position. The government hoped to get about $7bn from 3G licencing, but ended up getting more than $18bn. The first half of the financial year was a consumption-led story, the second half will be infrastructure-led.”

The Kotak India Focus Fund has already pulled in $85m from foreign investors since launch at the beginning of 2008 and a second fund will be presented to distributors shortly, again focusing on the market “sweet spot” of mid-cap companies.

It is Mr Kumar’s view that new themes in Indian investment – such as increased consumption of media, cars, soaps and cosmetics – are better reflected in the mid-cap than large cap space, with the country boasting more than 6,500 listed stocks.

“When we are looking at new strategies, we see if they can be developed in Dubai, Singapore and in Europe,” he says. “Some products only appeal to one market, but if a product appeals to multiple distribution markets, then it has priority.”

Around $1.6bn of the group’s $12bn funds total comes from investors outside India. “If you look at global allocations to emerging markets, India is right there in terms of performance, more so than Brazil and at the top of the pecking order,” says Mr Kumar.

“There is not really a lot of money invested by global players in India, so allocations can only increase.”

Although Kotak started its foreign operations 15 years ago, he is now expecting more competition from big players such as Reliance, which has just launched an Indian fund for foreign investors. “A lot of Indian players will try and be in this space,” he says.

While Mr Kumar shares the bullishness of most Indian-based investors, who are very reluctant to diversify outside their country, which is experiencing one of the world’s highest growth rates, he admits there may be other clouds on the horizon, which may not be as welcome as those bringing the Monsoon.

There is a worry that the market is powered by inward investments from foreign institutions, and that stocks can collapse, with local banks and insurance companies currently unable to support them. “Flows can be a problem for us,” says Mr Kumar, although he believes Indian institutions are beginning to increase their investments.

Shyam Kumar, Kotak