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Indian market which has already risen nearly 18 percent to fresh record highs this week have unnerved some analysts at a global investment bank, UBS.
The broking firm downgraded its rating on India to ‘neutral’ from ‘overweight’ initiated earlier in the month of February, citing a sharp surge in valuations which offers limited risk to reward ratio from current levels.
Back in mid-February, UBS raised India’s rating to Overweight post demonetisation trends which were beginning to improve, and earnings estimates which looked like hitting the bottom. The valuations were also looking the least high, relative to Asia ex-Japan, since PM Modi was elected in 2014.
“The downgrade is more reflective of India’s valuation relative to the region. In emerging markets, we are seen positive earnings momentum, but in India, we are still seeing earnings cut,” Gautam Chhaochharia, Head of India Research, UBS said in an interview with CNBC-TV18.
“We still haven’t changed our Nifty target. Out base case still remains at 8,800 while our upside case is 9,700 which in absolute terms means that we don’t see any more upside in markets for current levels,” he said.
Commenting on the midcaps, Chhaochharia said the relative valuations between the midcap and largecaps is off the charts even when we compare it with 2007, 2008 levels, supported by a recovery in the Indian economy and domestic flows. The risk-to-reward is still not attractive in midcaps.
What's changed?
The valuations have re-rated somewhat, and economics team UBS no longer expects the central bank to ease monetary conditions again this year.
The Reserve Bank of India’s (RBI) Monetary Policy Committee kept the key policy rate unchanged at 6.25 percent for the fourth time in a row. However, RBI reduced the Statutory Liquidity Ratio (SLR) of all banks to 20 percent from 20.50 percent of their net deposits from the fortnight starting June 24.
“India no longer looks so attractive, though much of this on the thematic side is down to the impact of demonetisation negatively impacting earnings in calendar 2018 versus this year's bounce back,” said the UBS report.
“Unfortunately, however, the valuation expansion in India has taken the country back to looking less attractive on our fundamental framework,” it said.
“We take it back to neutral for now, though recognise that a big slowing in the rate of upgrades in the more cyclical parts of the region will inevitably draw attention back to India's better structural story,” said the UBS report.
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