The global investment bank remains overweight on IT and private banks. It is underweight on wholesale funded banks, as well as small & midcaps.
Performance of Indian market in the last 2-3 years has been aided by local liquidity, including retail flow, which is vulnerable and is now slowing, said a UBS report.
The 10 year G-Sec and earnings yield gap, at a historical high, looks unsustainable. PE de-rating is likely for overall markets, it said.
UBS Nifty December 2018 target stands at 10,500, and upside/downside scenarios of 11,900/8,800 which suggest unattractive risk-reward for Indian market despite the recent correction.
The global investment bank is overweight IT and private banks, but is underweight wholesale-funded banks, as well as small & midcaps.
Indian market enjoyed a benign local liquidity period in the past 3 years, but this has changed and will likely remain tighter for the foreseeable future. Why?
India’s BOP (balance of payment) has moved from surplus to deficit, demonetisation impulse is behind and RBI's policy stance, explains UBS.
NBFCs and wholesale-funded banks have been key beneficiaries of benign liquidity. In the past years, debt AUMs of mutual funds grew at a 5-year CAGR of 20 percent to USD 200 billion, 17 percent of which is deployed in NBFCs.
NBFCs have moved from 21 percent of bank credit in FY10 to 34 percent now. The reversal in liquidity implies funding for NBFCs may remain tight. The recent adverse sentiment in the bond market could mean even higher borrowing costs for them. They are likely to see lower growth/margins ahead.
“We remain overweight on private banks with retail liability franchises. For investors looking to take advantage of NBFC share price weakness, our financials team recommends companies with a strong track record, strong parentage and strong pricing power,” it said.
UBS further added that Indian households' consumption grew ahead of income for 5 years as the saving rate collapsed and leverage rose. NBFCs have been a much higher % of system credit growth over the last few years, so a slowdown would hurt macro growth and possibly discretionary consumption.Disclaimer: The above note was written by Gautam Chhaochharia, Analyst, UBS Securities India Pvt. Ltd, Vishal Goyal, Analyst, UBS Securities India Pvt. Ltd, Tanvee Gupta Jain, Economist, UBS Securities India Pvt. Ltd, Ishank Kumar, Analyst, UBS Securities India Pvt. Ltd, Sanjena Dadawala, Analyst, UBS Securities India Pvt. Ltd.