The News International Team
Expecting the current growth momentum to continue, supported by strong macro and earnings data, UBS Securities remains bullish on Indian equities for Year 2015. Moreover, based on its growth forecasts, it sees Nifty at 9,600 by 2015-end.
In its latest report, the brokerage said that the economic growth recovery underway will likely sustain current valuations, especially as it starts manifesting in both “macro and micro data points”.
“Unlike the last three years, we expect consensus earnings growth estimates of 15 plus for FY16 and FY17 to be met, and ultimately, it is earnings momentum that drives markets,” the report said.
However, UBS expects only a gradual recovery and forecasts real GDP growth of 5.5 percent and 5.8 percent for FY15 and FY16, respectively, as the policy stance is still in consolidation mode both fiscal and monetary. It sees growth accelerating in FY17E (6.5 percent GDP growth), driven by inflation moderation, lower nominal interest rates, policy support, and balance sheet repair.
“The investment cycle does take time to recover and a significant impact may only be apparent from 2016-17 onwards,” the report said.
‘3 Arrows’ Ramp Up: UBS economists estimate inflation (CPI) to moderate to 5.7 percent in January 2016 (lower than the RBI’s goal of 6 percent), backed by macro and micro policies. In relation to that, they project 10-year Indian government bond yields of 6.5 percent by end-FY16, down from the current 8.2 percent.
UBS expects more policy action in 2015, including further progress on India’s ‘3 arrows’-Aadhaar unique identification numbers, GST tax reform (a possible game changer) and dedicated freight/industrial corridors. Some reforms on LPG/ urea, state-owned banks, coal/power, land are also likely, it says.
Oil A ‘Wild Card’: According to UBS report, brent crude sustaining at USD 85 per barrel could mean a USD 20 billion bounty for India (1 percent of GDP), all other things being equal. Though the brokerage agrees that its inflation moderation thesis since early 2014 has not been premised on softening oil prices, it feels oil is the ‘icing on the cake’.
UBS remains overweight on banks, oil and gas, power, telecom and media, underweight on two-wheelers and consumer staples; and neutral on four-wheelers and cement. It has turned neutral on consumer discretionary and pharmaceuticals from underweight.