Matthews sees value in Indian state-run firms

NEW YORK (Reuters) - Government-controlled Indian banks and oil firms still offer attractive investment opportunities in an overall pricey market, a fund manager with Matthews International Capital Management said on Wednesday.

"If there's one pocket where valuations are somewhat depressed or even attractive, I would say it's in the sector that is largely under state influence or suffers from the most regulatory risk," Andrew Foster, lead portfolio manager of the $638 million Matthews India Fund, said at the Reuters Investment Outlook 2007 Summit in New York.

"We do invest in such segments of the economy, both in financial services and in the energy sector," he said. "Multiples on these are quite a bit lower given the level of government interference in these segments of the economy."

For example, privately owned Indian banks trade at more than three times their book value on average, compared with a multiple of less than 1.5 times for government-owned banks.

Foster said he expected the risks related to state-run companies to disappear in the next 10 years or so as the government deregulates the economy.

The Matthews India Fund was the best performer among all mutual funds available in the United States in the quarter ended September 30, when it returned 17.88 percent, according to data from Lipper. The fund is up 25.88 percent so far in 2006.

While Foster declined to discuss specific stocks, his firm's Web site says the fund had state-owned gas transporter GAIL (India) Ltd. (GAIL.BO: Quote, Profile, Research, Stock Buzz) among its top holdings.

India's main 30-share Bombay index .BSESN is up 40.3 percent in 2006, despite sliding 7 percent in just three days until Wednesday. The index hit a record high of 14,035.30 on December 6.

"The market is priced with very little room for potential error," said Foster. "There's very little slack in valuations to accommodate any sort of even mild downturn in growth that might occur based on some sort of internal or external shock in the domestic economic outlook."