India's benchmark stock index is on course to double as spending on infrastructure such as roads and airports sustains economic growth, according to CLSA Asia- Pacific Markets.

The Bombay Stock Exchange Sensitive Index, or Sensex, has advanced 14 percent this year to 19,865.14 on Nov. 16, the best performer and most expensive among the world's 10 biggest markets. The $1.3 trillion economy may expand 8.5 percent in the year ending March 31, the fastest pace in three years, the central bank forecast on Nov. 2.

"The infrastructure-growth cycle suggests that India should be growing at these rates for the next five years, and this growth should see the Sensex at 40,000," CLSA's strategist Christopher Wood, who was ranked second in Asia by Institutional Investor in a 2010 survey, said in an interview yesterday in Gurgaon, near New Delhi. The forecast is dependent on "how soon issues in the Western world are resolved," he said.

India needs $1 trillion of investment in infrastructure including roads and ports between 2012 and 2017, double the estimated spending in the previous five years, to narrow the gap with China, according to the government Planning Commission. China's economy, which was about the same size as India's $183 billion in 1980, has swelled close to $5 trillion, four times that of India, after it boosted public spending.

The Stoxx Europe 600 Index yesterday added 0.5 percent, rebounding from the biggest drop in four months the European Union and International Monetary Fund prepared to scan the books of Ireland's banks in a prelude to a possible aid package to stem Europe's widening fiscal crisis.

Irish Turmoil

The Irish turmoil marks a new stage in the sovereign debt crisis that was triggered by Greece and threatened to break the euro region apart in May, forcing the EU to set up a 750 billion-euro ($1 trillion) rescue fund.

Stocks on the Sensex are valued at 18.8 times earnings, the most expensive in Asia and among the BRIC markets that also include Brazil, Russia and China. The multiple compares with 13.3 times for Brazil's Bovespa Index, 7.7 times for Russia's Micex Index and 16 times for China's Shanghai Composite Index.

"I don't think there is an asset bubble in India yet," Wood said. "My basic point is that with the economy growing at this rate, we should focus on domestic demand areas."

He recommended financial, infrastructure finance and cement companies, declining to name any. "I will have the banks in my portfolio because they lend to infrastructure," he said.

Stock markets in the biggest developing nations may double as the U.S. Federal Reserve's monetary stimulus sends valuations back to their 2008 peak, Dylan Grice, a global strategist at Societe Generale SA, said in a report last month. Emerging-market valuations could go "much further before they could be considered seriously stretched," Grice said.

Tactical Cut

CLSA has advised investors to "tactically" pare their overweight on Indian stocks as rising commodity prices, particularly oil, pose a "short-term threat," while sticking with the market for the long term, Wood said. The Sensex has retreated 5.4 percent from the Nov. 5 record of 21,004.96 on concern China will raise interest rates and impose price controls as food and energy boost the cost of living.

The four lenders on the Sensex, including State Bank of India and ICICI Bank Ltd., are among the gauge's top ten performers this year. The Bombay Stock Exchange Bankex index has surged 42 percent this year.

Cement production by companies such as Ambuja Cements Ltd., a subsidiary of Holcim Ltd., the world's second-largest maker of the building material, rose 5.2 percent in September from a year earlier after a 1.6 percent gain in August, according to government data.

Long-Term Key

"The long-term key macro-economic variable to focus on in India is infrastructure," Wood said. "So long as infrastructure is happening, India will grow at 8 percent to 9 percent."

India's finance ministry estimates that India produces about 10 percent less electricity than it needs, and roads, which account for 65 percent of the nation's cargo, are plagued by single lanes and irregular surfaces. Infrastructure spending accounts for just 4 percent of India's gross domestic product compared with 9 percent of GDP in China, according to CLSA.

It's "reasonable" to expect growth to return to a "robust" average of 9 percent before the global financial crisis, Finance Minister Pranab Mukherjee said on Nov. 14. India is in a position to sustain "high economic growth in the coming decades," he said.