“PE de-rating is likely for overall markets, in our view, as current 1y forward PE for Nifty (18x) is near historical highs and off earnings likely to be cut 7-8%,” as per UBS report.
The correction seen in the Indian market in the last couple of days despite strong global cues is a reflection of the uncertainty that has gripped D-Street, analysts at UBS said in a note.
"If this is a temporary liquidity squeeze or a potential new credit shock remains difficult to gauge. While unlikely a systemic issue, we worry about a negative feedback loop developing, given rich valuations; hence it is still not a buy on dips market," said the note.
UBS is of the view that NBFCs have been a much higher percentage of system credit growth over the last few years, so a slowdown will hurt macro growth and specifically consumption.
Indian households' consumption has grown ahead of income growth for 5 years, as the savings rate collapsed and leverage rose. The 10-year G-Sec and earnings yield gap, at a historical high, is unsustainable.
“PE de-rating is likely for overall markets, in our view, as current 1y forward PE for Nifty (18x) is near historical highs and off earnings likely to be cut 7-8%,” added the report.
The global investment bank sees Nifty hitting 10,500 by December 2018 on the back of fall in local liquidity. Retail flow is slowing and our vulnerable. “Our Nifty Dec-18 target of 10500 and upside/downside scenarios of 11900/8800 suggest unattractive risk-reward for Indian markets despite the recent correction,” analysts said.
“The global investment bank remains overweight in IT, private banks with retail liability franchises while NBFC stocks have corrected 10-40% in the last month but 30% of them are still above their 5y average P/BV. We were not positive on NBFCs but now move from Neutral to UW in our portfolio positioning,” it said.(Disclaimer: 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. contributed to the note. The views and investment tips expressed by investment experts on moneycontrol.com are their own and not that of the website or its management)