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Follow UsBOMBAY: "The three sectors that look vulnerable in the event of long war are software, oil and petrochemicals," is the common sentiment echoed by the fund managers. Refiners and petrochemicals companies face higher input costs as oil prices have risen some 20 percent this year on concerns that a war in Iraq could upset oil supplies from the Middle East.
"We believe blue-chips such as Infosys and Reliance which have huge foreign ownership will be the worst affected as fund managers pull money out of risky assets globally," said Richard Chua, a Singapore-based portfolio manager with Nikko Global AMC.
Foreign funds own about 40 percent in software bellwether Infosys Technologies Ltd and 14.5 percent in petrochemicals giant Reliance Industries Ltd.
The Bombay Stock Exchange's IT index has already slumped 8.9 percent this month, rattled by fears a war in Iraq would hurt the sector.
Exports accounted for about 76 percent of the software firms' revenues in the year ended March 2002, with more than 60 percent coming from the United States.
"If the war draws out, then we expect spending by U.S. firms to shrink and this will have a negative impact for Indian technology firms," said Singapore-based Samir Arora, head of Asian emerging markets for Alliance Capital Management.
The Middle East crisis has overshadowed the national budget presented on February 28 which restored full tax breaks on software service exports, stoking a brief rally.
Foreign funds have pulled out $1.4 million from Indian stocks this month, dragging the benchmark Bombay index, one of only five gainers across Asia in 2002, down 5.3 percent.
The funds were net buyers of $306 million in the first two months of the year. "Most investors are anticipating a quick end to the war and the market has not factored in a drawn out affair," said Andrew Holland, executive vice-president research at DSP Merrill Lynch.
But hopefuls are the banks, defensives
However, fund managers saw value in bank stocks, particularly state-run banks that dominate the sector, due to expectations that the government would ease the ceiling on foreign investments. The sector is already riding a boom in retail loans growth and bond trading profits.
Consumer goods makers and pharmaceuticals firms will retain their traditional appeal as defensive stocks, they added.
A huge middle-class, estimated at more than 200 million people and growing steadily, is expected to keep demand for goods and services going.
The large domestic markets also makes India an attractive destination for foreign investors over a longer timeframe, analysts said.
India's economy, the world's 12th largest, has grown by an annual average of 5.4 percent over the past five years. It is expected to slow to 4.4 percent this year due to a poor monsoon, though still at a healthy clip in a global slowdown.
Forex reserves of about $73 billion, among the biggest in the world, are enough to cover more than one year's imports.