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.
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