The Indian market has been constructive for the last three months, however, after the recent rally, the risk-reward has become less attractive for the near term, according to UBS, an investment banking company.
Its base-case target for Nifty by June 2020 is 12,300, based on 18x forward PE multiple, with upside and downside scenarios at 13,300 and 10,300, respectively. The investment bank added that the recent announcements like corporate tax cuts are a sentiment booster and could provide support to the indices.
"We think some green shoots can be squeezed out in the current gloomy backdrop like petrol/diesel demand recovery, tourist arrivals/airline volumes, rail cargo, and PMIs," said UBS in the report. It, however, noted that most other high-frequency data points remain muted.
"At a macro policy level, systemic liquidity is quite positive but still elevated credit spreads suggest risk aversion," it said.
For India, the brokerage is 'overweight' on financials, property, oil & gas, power utilities, life insurance, and telecom. It is 'neutral' on consumer staples, consumer discretionary, metals, pharma, cement, and industrials. Finally, it is 'underweight' on auto, IT services, and small and midcaps space.
Major ConcernsAccording to UBS, power generation has declined YoY over the past four months, never seen in history and even though it might not be an obvious lead indicator, it remains a concern. Recent coal supply disruptions and the recent requirements of furnishing guarantees by discoms are also playing a role, it added.
"Bigger falls in states like Maharashtra, Gujarat, Karnataka, and Telangana are likely indicative of industrial demand impact. Arguably, consumer demand slowdown plays out through the supply chain and ultimately drives manufacturing slowdown – so this data could be reflective of slowdowns in consumption/economy since last year," the report stated.
It further said that inventory drawdown in autos may be nearing an end as recent reports suggest a revival in manufacturing in large companies post the festive season demand-driven inventory drawdown, though it added that it has not seen similar evidence in other manufacturing sectors yet.
Another major concern remains retail inflows, as per UBS, since the support from local inflows has been key for Indian markets since FY16 in sustaining rich multiples on the backdrop of sustained earnings disappointments.Net inflows into equity mutual funds for November were at $180 million, the lowest in 41 months. Lower returns, or even negative in some cases, are potentially leading to retail redemptions, UBS said.
However, it explained that 2019 has been more about Foreign Institutional Investor (FII) flows and helped performance recently too. Risk sentiment globally, say around the trade deal between the US-China, may matter more in the near term, it added.
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