Union Investment fund banks on India, China demand

A new Union Investment fund is aiming for rapid expansion to up to half a billion euros as it banks on the consumption boom in market behemoths China and India, its manager told Reuters in an interview.

China and India together account for more than a third of the world's population. Analysts expect growing middle class prosperity to boost spending on consumer goods.

Per capita income in China -- which recently overtook Japan as the world's number two economy -- was about $3,800 in 2009 while India's was about $1,000.

"Historical examples -- take South Korea or Taiwan for instance -- suggest that breaking the barrier of $3,000 entails a significant growth in consumption," Meng Si, manager of the Union Investment Emerging Markets China & India Fund , said.

Chinese consumer stocks were the first to benefit from this development, Si said, adding that this would have a knock-on effect on other industries in the country.

"This, in turn, will also benefit financial stocks as a spending population will need the advantages of retail banking and other financial services such as insurance," she said, also pointing to the healthcare and infrastructure sectors.

Top holdings of the fund include China's state-owned oil firm CNOOC, Agricultural Bank of China, China's third-biggest lender, and India's number two outsourcer Infosys Technologies.

Si said that while the fund's size should ideally range between 200-500 million euros ($254-635 million), the final portfolio of the new product would consist of 50 to 60 Chinese and Indian companies.

The fund returned about 3.7 percent since launching in mid-July. This compares with a 5.1-percent rise of the MSCI China Growth Net Return Index (USD) and a 2.2-percent increase in the MSCI India Growth Index (USD).

Si said that India was likely to match or even outpace China's gross domestic product (GDP) growth -- which is expected to fall below the 10-percent mark in the third quarter -- in the next 5-10 years.

India's GDP growth was 8.8 percent in the second quarter and it expects growth to be 8.5-8.75 percent in 2011.