In our view, the recent liquidity squeeze would not turn into a prolonged credit crunch although we believe the easy money seen over the past 3-4 years is behind us, said Gautam Chhaochharia of UBS
Gautam Chhaochharia
The second edition of the UBS Evidence Lab Market Thinking Game was sent to investors in the week of October 31, 2018. The survey, instead of asking investors their own views, asked investors to predict what other investors think.
Specifically asked were two questions:
1) to rank five possible drivers for the Nifty in order of importance, according to their perception of other investors' views; and
2) to predict market sentiment around the Nifty ranging from very bearish (a score of 1) to very bullish (a score of 5).
Sentiment has turned bearish; oil, liquidity top drivers
About 61 percent of the respondents indicate a bearish sentiment for the Nifty compared to 31 percent in the previous survey. Only 7 percent of respondents remain bullish compared to 28 percent last time.
The responses indicate oil prices continue to be the most important driver– much like the first survey conducted in July 2018.
Liquidity for financials is considered to be the second most important driver, followed by politics/elections. Notably, fund flows appear to have lost their importance in investors' minds and has been assigned the least important ranking. The rupee exchange rate continues to be ranked lower.
Investor sentiment at UBS India Conference
At the 14th UBS India Conference, overseas investors indicated continued robust interest in India. However, the recent market correction and key developments (liquidity crunch, oil, and RBI-government issues) were clearly a consideration among investors.
Most global/global emerging market (GEM) investors appear to be willing to weather the above, given India’s relative growth potential. Most global investors appear to be presuming that PM Narendra Modi will come back in 2019, and the markets may not be pricing in any build-up of potentially adverse perceptions into May 2019.
Rich valuations and elections/local flows risk mispriced
Markets have de-rated from 19x one-year forward PE to 16x. Perhaps, the above bearish sentiment suggests a potential bottoming out?
In our view, one of the major factors behind the fall in markets (recent liquidity squeeze) would not turn into a prolonged credit crunch although we believe the easy money seen over the past 3-4 years is behind us.
The worst of rupee depreciation against GEM currencies may be behind us too. However, two key risks remain for the markets: 1) whether Modi will win in 2019; and 2) retail flows.
H2FY19 growth may also not enthuse markets, as the base effect wears off and the impact of tight liquidity is felt. Under the base case, UBS has a target of 9,500 for March 2019 on Nifty and upside/downside scenario of 11,100/8,300 – implying unattractive risk-reward.
The author is Analyst, UBS Securities India Pvt. Ltd.
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