WHAT, ME WORRY ABOUT ATOMIC TESTS? INVESTORS UNSHAKEN BY INDIA’S BIG BANG

The fallout from India’s nuclear test blasts may eventually land on the private sector, but investors aren’t in duck-and-cover mode yet.

India’s stock market rebounded late last week, mainly because many investors believe the economic sanctions imposed by the United States and other countries would initially affect just the government sector.

But the withholding of foreign aid and loans to the Indian government by both government and commercial banks could ultimately have an effect on companies doing business in India, especially if that nation declines to sign the Comprehensive Test Ban Treaty.

underestimating seriousness

Investors have “underestimated the importance of (the situation’s) seriousness,” says Amit Khandwala, senior vice president of international investments at Bridgeport, Conn.-based Wright Investors’ Service.

The level of foreign portfolio investment in India is approximately $9.2 billion, according to a May 5 report by the Securities and Exchange Board of India. Of that, about $7.1 billion is direct –primarily from institutional investors. There are four closed-end India funds, but their largest shareholders are institutions.

on the front line

The U.S. companies that probably will be hit first by the sanctions are builders of India’s energy infrastructure, such as Houston-based Enron International and Cogentrix Energy Inc. of Charlotte, N.C. Enron is constructing a 2,450-megawatt plant near Bombay that is to be completed in December — and needs further financing. Cogentrix is building a plant in the state of Karnataka in a joint venture with Hong Kong-based China Light and Power Ltd.

But Frank Chiang, portfolio manager for the Montgomery Emerging Asia Fund, says power plant construction may be delayed, but not canceled.

Meanwhile, Indian software companies would feel the pinch if U.S. companies are banned from doing business in the subcontinent. Indian firms, such as Tata Consulting Co., a subsidiary of the Tata Group conglomerate, have been working with U.S. software companies to head off anticipated Year 2000 computer problems. American software outfits, however, also may suffer should the U.S. government curtail or fail to renew the six-month temporary visas granted to Indian workers.

While Indian stocks rebounded last week, the fact that the sanctions dropped the rupee to an all-time low should give investors pause, says Graham Allen, director of Wells Capital Management’s global fixed-income group. If the currency continues to weaken, it could set off a cycle of events that leads to an economic crisis.

Once the currency falls, imports may dry up, Mr. Allen explains. Unemployment may rise, as may inflation, because imported products will cost more. Then government deficits may rise as India subsidizes the unemployed workers. He compares the potential crisis to that now facing Indonesia. The problems there started, Mr. Allen says, when the government lifted its energy subsidies as part of its bailout deal with the International Monetary Fund. Energy prices soon jumped 50% to 70%.

So far this year, the Indian economy has been healthy despite the turmoil in the rest of the region.

“When the Asian crisis broke, the rupee didn’t deteriorate,” Mr. Allen notes.

Montgomery’s Mr. Chiang says the sanctions probably will cause a drop of only half a percentage point in the growth of the Indian economy this year, projected at 5% to 6%. The relatively closed economy — only 10% is dependent on trade — probably will insulate the country, Mr. Chiang says.

Mark Madden, portfolio manager for emerging markets at Pioneer Mutual Funds in Boston, also doubts there will be much of a long-term effect. “Since the global community has not come out with its own sanctions against India and is not expected to, the whole business is likely to blow over,” adds Mr. Madden, whose fund has $20 million invested in India.

He sees a buying opportunity. “We’re value oriented and contrarian investors,” he says. “Many investors have pulled out of India, but for us, it’s a good time to buy.”

But if India is dragged into the Asian economic mire, investors’ attitude could be the reason, says Karan Trehan, senior vice president with Alliance Capital Management of New York.

“There will be a slowing down of foreign flows to the capital markets,” he adds. “Foreign institutional flows will be impacted by 50%.”

Ricki Fulman of InvestmentNews sister publication Pensions & Investments contributed to this story