India’s infrastructure is booming and the Asian giant is significantly increasing spending in the sector. Investment in this market is also paying off – infrastructure funds are generating the highest returns. Those who prefer picking stocks in emerging markets like India and want to invest purely in infrastructure may be wondering which stocks to bet on. Causeway Capital Management’s Arjun Jayaraman likes one pure-play infrastructure stock: REC, a company that makes loans to electric utilities and other infrastructure. “It’s one of the cheapest ways to leverage infrastructure,” the portfolio manager told CNBC Pro Talks last week. “A lot of infrastructure in India is quite expensive because the market knows that infrastructure is a big part of the Indian story,” he added. Jayaraman also believes that since the stock is a state-owned enterprise, the “risk is very low.” “The fact that it is government-owned makes it almost as if the government guarantees the loans it makes,” he said. Jayaraman also said its dividend yield is “strong” and its price-to-earnings ratio is “strong” – Both seem “reasonable”. International investors who may not find it easy to buy Indian stocks can invest through international brokers or through exchange-traded funds. For example, REC accounts for 4.5% of the Nifty India Financials ETF. Jayaraman manages Causeway’s Emerging Markets Fund and International Opportunities Fund. Both funds have outperformed their benchmarks in the year to May 31, with the former up 13%, beating the MSCI Emerging Markets index by 3.5%, and the latter up 9.6% year-to-date, beating the MSCI ACWI index by 6.1% – although Indian markets have been volatile recently, but American Jayaraman remains bullish on India overall. Prime Minister Narendra Modi surprisingly failed to secure an outright majority for his party in recent elections. While he called the Indian market a “very strong growth story”, he said focus would be on the small and mid-cap market. “Since India is a strong long-term growth market, we believe small and mid-cap (market) is the best bet. That’s where you get the maximum beta, or the most exposure to strong long-term growth. Large caps will also be Well, they will participate in the growth, but not to the same extent as small and midcaps,” Jayaraman said. India is his top pick among emerging markets, and he said its long-term prospects are good, although there may not be “huge upside” in the short term. For the BSE Sensex, he predicts total returns to fall into low single digits to high single digits to low double digits.
