The HSBC Indian Growth Fund (click here to read the factsheet) has outperformed both its benchmark and its peers year-to-date. For example, the fund was up 45.01% while the benchmark (the S&P/IFC Investible India Index) rose 37.94%. And since its launch in March 2000, the fund has posted an annualised return of 3.01% vis-a-vis the benchmark's annualised return of 0.42%. All performance figures are calculated using offer-to-bid prices, with dividend reinvested, in Singapore dollars and as at 30 Sep 2003. See performance tables.

ANNUALISED RETURNS* OF HSBC INDIAN GROWTH FUND VERSUS BENCHMARK** (as at 30 Sep 2003)

ANNUALISED RETURNS* OF HSBC INDIAN GROWTH FUND VERSUS PEERS (as at 30 Sep 2003)

Going forward, the fund's manager Sanjiv Duggal thinks that the stock market is still attractive despite its recent run-up. He gives his views on the market and an update of the fund in this e-mail interview with Fundsupermart.

A: We are 'business cycle, relative value' investors, adopting neither a purely 'value' or 'growth' approach to equity investing. Instead, in pursuit of consistent performance, we adapt our approach to the prevailing economic conditions at the time. We seek to identify where we are in the business cycle and where relative value exists in a market, and invest accordingly.

Depending on our judgements of the business cycle and relative value, our portfolios may have a growth or value bias. Fund composition is determined by analysing the business cycle to identify those sectors that offer value relative to the market. Once we have chosen our sectors, we then focus on picking the stocks in each sector. Within this, we also consider the impact of government policy and any competitive advantage India offers. We manage our portfolios actively to take advantage of market opportunities and add value to the portfolio.

Our disciplined top-down process described above has enabled us to make some good sector calls supported by good stocking picking in these sectors. Our underweight in consumer staples and overweights in auto, cement, technology and pharmaceuticals aided performance.

Q: The Indian stock market, as measured by the Sensex 30 Index, is up nearly 50% year-to-date (as at 21 Oct 2003). Do you expect a significant correction of say, about 10% to 20%, in the market soon?

A: The Indian stock market was undervalued in the past as it was adversely affected by rising tensions with Pakistan, investor concerns on UTI (Unit Trust of India), and slow progress made by the government on privatisation of PSUs (public sector units). As these concerns eased, the markets rallied.

Momentum of inflow from FIIs (foreign institutional investors) remains strong and stood at US$ 855 million for September 2003. This is one of the highest amounts that FIIs have ever invested in a month, since they began investing in the Indian stock market. In the last five months, net inflows by FIIs were over US$2.5 billion. FII inflows crossed US$ 1 billion in October 2003.

In addition, falling interest rates, tax exemption on dividends, and long-term capital gains should boost retail investments in equities. So we do not see a sharp correction in the market due to the factors that we have mentioned above.

Q: How well do you think the Indian stock market will perform over the next 2 to 3 years?

A: Despite the recent performance, (we think) the Indian stock market remains attractive for medium to long-term investors. We believe the following factors should help the market to perform:

• Improved GDP (Gross Domestic Product) growth. A normal monsoon this year will help improve agricultural growth in financial year 2004. We expect GDP growth to improve to 7.1% in financial year 2004 from 4.3% in financial year 2003.
• Domestic demand is also expected to improve strongly, especially in rural areas, as the monsoons are above the normal levels and uniformly spread across the country.
• Corporate performance is expected to improve in financial year 2003-2004 and stock market valuations remain attractive for long-term investors. The market will soon start considering financial year 2004-2005 numbers. The sharp fall in interest rates and strong equity gains made recently should improve investor sentiment towards equities.
• India is leveraging on its global competencies in services and manufacturing and showing top line growth, notwithstanding sluggish economies worldwide, and should attract the attention of global investors.

Q: Which sectors are you currently bullish on and why?

A: We have upgraded our GDP forecast to 7.1% for financial year 2003-2004 on the back of above normal monsoons. Our investment process on a top-down basis indicates that there is significant upside for sectors related to the economy.

Technology
We are overweight in technology as we expect earning upgrades for financial years 2004 and 2005. Strong volume growth, stable pricing and easing margin pressure should drive earnings in future. Recruitment is at historical high and companies seem to have reconciled themselves to an appreciating INR (indian rupee) and improved productivity levels to ensure that it has limited impact on margins. We do not expect aggressive appreciation in the INR.

Automobiles & Cement
We expect strong volume growth in automobile companies. And the earnings of automobile companies are extremely sensitive to sales volumes. We also expect improved realisations for cement companies. The earnings of cement companies are extremely sensitive to cement prices. We expect strong earnings growth from these companies and significant upgrades in earnings estimates from analysts.

Pharmaceuticals
Indian companies are among the fastest growing companies in the US generic drugs market. Strong process skills and low cost manufacturing capabilities give Indian companies a competitive edge in regulated markets. We expect strong earnings growth in the near to medium term.

Q: Given your outlook for the sectors above, how is the fund currently positioned?

A: We remain overweight in the technology, automobiles, cement, and pharmaceuticals sectors.

Q: Which sectors are you avoiding and why?

A: We remain significantly underweight in consumer staples. Demand growth continues to remain slack and competition is increasing. Results from most consumer companies have been lackluster.

Q: What are the key risks in your outlook for Indian equities over the next 2 to 3 years?

A: India has a history of one-off events. A series of negative news flow - stock market scam, UTI issues, attack on the Indian Parliament, border tensions, Gujarat violence and divestment delays were primarily responsible for the poor market performance since March 2001 till April 2003.

'No investment decision should be taken without first viewing a fund's prospectus. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Past performance and any forecast is not necessarily indicative of the future or likely performance of the fund. The value of units and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. Please read our disclaimers.'