Fund that beat 96% of its peers counts financial stocks as its biggest bet

India’s lending crisis isn’t over. And yet, a fund that beat 96% of its peers in the past year counts financial stocks as its biggest bet.

Karthikraj Lakshmanan, the primary fund manager of the BNP Paribas India Consumption Fund, said he will keep investing in the industry -- including private-sector banks, insurance firms and asset managers. His argument? Earnings at some of those companies could rise at a compound annual rate of as much as 15% over the next half decade, backed by growth in retail credit and consumption.

Lakshmanan is not the only one betting on consumer financing in a country where corporate lenders have taken a hit for the past year and a half. IIFL Asset Management Ltd., for one, is launching a strategy that invests in financial institutions focused on retail credit, estimating it will triple over the next decade.

“Household balance sheets are the strongest,” said Lakshmanan, adding that India’s household leverage is relatively low compared with other countries and that families are likely to boost spending in the next few years.

In 2018, India’s household debt-to-GDP was at 11%, versus 76% in the U.S. and 54% in China, according to International Monetary Fund data.

As retail credit expands, some private-sector banks are poised to grab market share from state lenders, clocking low- to mid-teen earnings growth versus an expected nominal gross domestic product of 9% to 10%, according to Lakshmanan. Profits at private-sector insurers, too, can increase at a similar pace given that India is “quite under-insured and bancassurance channels have helped some large insurers grow,” he added.

Financial institutions accounted for one-third of the India consumption fund’s assets in December, according to its fact sheet. Top holdings included HDFC Bank Ltd. and ICICI Bank Ltd. The Rs 4.7 billion ($66 million) fund has returned 22% over the past year. SGX Nifty 50 Index futures expiring this month were little changed as of 9:17 a.m. in Hong Kong.

Troubled banks have hurt India’s economy, which is set to expand at its slowest pace since 2009, putting it behind China, Vietnam and a few others in Asia. Still, there are pockets or companies that “could grow better” even during an economic slowdown, according to Lakshmanan.

Aside from financial institutions, the fund invests in businesses that directly participate in the consumer sector. That includes companies related to the non-durable goods industry such as Asian Paints Ltd., as well as entertainment plays like PVR Ltd.

Many sectors of the economy are still under-penetrated, including personal care, airlines, movie theaters and cars, Lakshmanan said. But when it comes to autos, he maintains an underweight stance because of regulatory headwinds.

India’s young “demographics are not going to change in a hurry for at least the next 10 years,” he said. “That is the opportunity and the challenge.”