After a flat 2018 in terms of index returns, retail investors are hoping for a blockbuster 2019, but UBS thinks otherwise. The global investment bank has given a target of 10,000 in its base case scenario which translates into a fall of 8 percent from Tuesday’s closing of 10,886.
“Our base case Nifty target for 2019-end is 10,000, implying a downside of 7 percent, while our upside/downside scenarios also suggest unattractive risk-to-reward,” said the report. While GDP growth may recover a bit, political and policy uncertainty keeps us cautious, it highlighted.
The global investment bank is overweight IT, private banks and property, and remains underweight on industrials/infrastructure and small and midcaps (SMIDs).
It further added that UBS has more neutral/underweight sectors than overweight, similar to 2018. It recommends investors to take more stock-specific calls rather than sector-specific calls.
Here are three possible reasons highlighted by UBS:
Politics to drive markets in H1:
A positive narrative on reforms/policies has supported rich valuations over the last 4 years despite earnings cuts. The recent build-up of a populism narrative being only a pre-election phenomenon is likely the market's expectation.
Potential structural challenges facing rural India and populism's unclear role in deciding electoral outcomes imply that the post-May 2019 narrative will be key for 2019 performance.
Still more cuts ahead in earnings:
Earnings have missed forecasts for a while, but this has been ignored by investors. Consensus expects FY20/FY21 earnings growth of 25%/18%, while UBS top-down estimates are 16%/14%, implying a 9 percent cut to FY20 estimates.
Return to double-digit growth may be due to the normalisation of earnings for financials rather than a broad-based underlying pick-up.
UBS is of the view that 3 out of 4 key macro drivers remain missing: 1) fiscal/monetary impulse; 2) a disappointing capex recovery, and 3) muted export growth. The credit cycle remains a silver lining, but sustainability depends on the above.
Retail flows are moderating:
Benign liquidity has supported India’s premium valuations and increased local flows into the equity market. Although liquidity has started to normalise post the tight phase in H218, easy money of the past three years is unlikely to be back in a hurry.
Historical returns have supported retail flows historically, and this too is now less of support. UBS-Financial Conditions Index also suggests waning support for flows and returns.
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