UBS downgrades Indian equities citing valuations

Investment bank UBS on Thursday cut Indian equities from “overweight” to “neutral”, citing the rise in valuations after stocks touched a record in June, and striking the first cautionary note in what has until now been a happy aria. The firm’s move is also prompted by its belief that the Reserve Bank of India will not cut rates this year.

“Valuations have re-rated somewhat, and our economics team no longer expects the central bank to ease monetary conditions again this year,” Niall MacLeod, head of Asian equity research strategy at UBS Investment Bank, said in a note.

“On our models, India no longer looks so attractive, though much of this on the thematic side is down to the impact of demonetisation negatively impacting earnings in calendar 2018 versus this year’s bounceback,” he wrote.

UBS upgraded India to overweight in mid-February on expectations that the impact of demonetisation, the government’s

surprise move to scrap all old high-value notes in November 2016, was easing; earnings couldn’t go any lower; and valuations were looking good relative to Asia excluding Japan.

On Thursday, the BSE Sensex closed 57.92 points, or 0.19%, lower at 31,213.36 points and the broader NSE Nifty was down

16.65 points, or 0.17%, at 9647.25 points from their previous close.

Since the beginning of the year, the Sensex and Nifty have gained 17.23% and 17.85%, respectively, and both benchmark indices touched record highs on 6 June.

In terms of valuation, the Sensex is trading at 18.95 times projected earnings for 2017-18, and the Nifty at 18.41.

On Thursday, UBS said the increase in valuation has made India look less attractive, but added that a slowing in the rate of upgrades in more cyclical parts of the region would inevitably draw attention back to India’s better structural story.

In a separate note, UBS Securities India said it has downgraded ratings on some small and mid-cap companies on uncomfortable valuations.

On June 6, Morgan Stanley raised its Sensex target for June 2018 to 34,000 points citing an upbeat corporate earnings outlook and strong economic growth.

Citigroup Inc expects the Sensex to hit 32,200 points by March 2018.