Mumbai, Nov 27: Taking a contrarian view, Morgan Stanley Dean Witter, the US-based investment banker has said that the market conditions in India may result in "increased participation and hence higher allocation in Indian stocks by the foreign fund managers".

According to Jay Pelosky, emerging market strategist, India is a favourite investment destination in the Asian region in view of the relatively low interest rates, favourable government policies and largescale corporate restructuring. "In the domestic economy we expect investors to allocate a higher proportion of their household savings to equities as alternative options have become less attractive.

This allocation is likely to grow with increasing evidence of a turnaround in the economy," the report said.In its latest report - India: Fortnightly Review; Investment Themes for 1998 - analysts said "we view Indian companies as being attractively priced relative to their medium-term growth potential.

Stocks are trading at around 10 times their FY1999 estimated earnings, which is less than half the estimated growth rate for earnings for the next two years. We are setting a target for the 30-share BSE Sensex at 4,925 by December 1998". The BSE Sensex closed Thursday at 3,628 points, up 92 points from the previous close of 3,535.52. With today's close as a base, it could be inferred that analysts at Morgan Stanley are confident that the Sensex could climb during the next year by a whopping 35.79 per cent despite allround bearishness prevailing. During the last one year, the BSE Sensex (till November 27) has crawled up by 780 points from 2,948.44 points recorded on November 26, 1996.

A Caveat: "A sharp depreciation in the rupee and a slowdown in forex capital flows could derail our argument. We, however, do not foresee a sharp fall in the value of the rupee in view of the low current account deficit, increasing flows from invisibles - tourism and remittances from NRIs, low exposure of the banks to the real estate sector, etc. Bureaucratic hurdles continue to be a major concern," the report said.The report outlines five main reasons for bullishness. One, economic recovery, which is expected to be well underway in 1998; two, low interest rates and benefits of restructuring could lead to "considerable improvement in corporate profitability"; three, the analysts expect the government to start awarding contracts for infrastructure projects, which with financial closure of many power projects should ensure significant improvement in investment demand. Four, continued government support to the reforms process by "this and any future government" and five, market capitalisation of the GDR universe to increase significantly as also the number of scrips that will be traded in the demateralised form. u, the report states.The report adds, "although an initial offering from the government has been postponed for the time being, we expect this and some more GDR issues to be cleared in 1998. This would lend more depth to the GDR markets and narrow spreads, leading to a fall in the average GDR premium. Thus, we expect these market conditions to lead to increased participation and hence higher allocation in Indian stocks by foreign fund managers".

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.