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OCTOBER 17, 2005
Japan's Indian Love Affair Japanese investors are pouring billions into Indian stocks, but are they too late? In September, Deutsche Asset Management, the investing arm of Germany's Deutsche Bank (DB ), conducted a series of seminars in Tokyo, Osaka, and Nagoya on opportunities in India for Japanese retail investors. The bank had launched a dedicated India fund in Japan last December, which took in $175 million. But it didn't realize just how much interest there was until the seminars, which, to everyone's surprise, attracted 600 ordinary Japanese -- twice as many as expected. They had studied Indian equity markets and asked "sophisticated questions," says Kimiharu Fujisawa, head of investment trust management, sales, and marketing for the asset manager in Tokyo. Deutsche Asset Management now expects the fund to reach $900 million by the end of 2006. 
Japan has discovered India -- or at least the India bourse, as represented by top companies in the Bombay Sensitive Index, or Sensex. At least six India-dedicated megafunds have been launched in Japan in the past year, including two from Tokyo-based Nomura Securities (NMR ) worth a combined $1.2 billion, and a $1.4 billion Fidelity Investments fund. This year Japanese mutual funds have poured some $1.7 billion into yen-denominated investments in Indian stocks as of August, according to the Japan Investment Trusts Assn. But traders say the amount of Japanese money earmarked for India through offshore funds is more than double that -- or about half of the money coming into Indian stocks from abroad. The question is: Does Japan's infatuation with things Indian signal that India's astonishing bull market has peaked? India's Sensex is one of the world's top performers, up 33% this year and climbing. Meanwhile, Japan has rocketed from nowhere to become the third-largest foreign investor in Indian stocks after the U.S. and Europe. Traders say the sudden surge of money from Tokyo has been a big factor behind the rise of the benchmark index from 6,000 points in January to 7,000 in July. Recently the market has soared to 8,800 on a speculative spike. Some analysts expect it to fall back to 7,500 before yearend on profit-taking. "Higher oil prices and the fiscal deficit could damage the macro picture, and funds could start to flow out," says Andrew Holland, head of research at Merrill Lynch in Bombay. CORRECTION DUE? India's chief appeal is the same for the Japanese as it is for other investors -- the country's smoking-hot growth. Gross domestic product in India expanded 8.1% in the latest quarter. Plus, Indian companies such as software services provider Infosys Technologies Ltd. (INFY ) and steelmaker Tata Steel are popular with fund managers because of their good governance and strong profits. But with concern spreading in Bombay that a correction is overdue -- even if only a short-term one -- some Japanese investors may be too late to the party. "It's very much [the] flavor of the month," says Kirby Daley, a strategist at Société Générale Securities' Fimat division in Tokyo. "If Japanese investors are simply chasing returns, they could be very disappointed in the ensuing months." Unlike U.S. and European investors who have been active in India for the past couple of years, the Japanese are relative newcomers. That's because until recently no major funds offered in Tokyo focused on India. One catalyst for the Japanese was Infosys' $1 billion offering of secondary American depositary receipts in May, for which Nomura served as the lead manager. Japan's investors also have become less enamored with China funds because of the weak performance of Chinese equities, poor governance at mainland companies, and fears of slowing growth. Sino-Japanese friction hasn't helped, either. For their part, Indians see the Japanese money as a vote of confidence. "[It's] a signal that the retail investor in Tokyo accepts that India is a stable market," says Manish Chokhani, director at Enam Securities in Bombay. But that depends on investors staying put for the long haul. A correction will test everyone's resolve.  By Manjeet Kripalani in Bombay and Ian Rowley in Tokyo
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