UBS has downgraded Indian shares to ‘neutral’ from ‘overweight’, as the foreign brokerage no longer sees the potential for big downside inflation surprises or aggressive policy easing from hereon.
“We continue to think the best theme in the region is to be tilted towards policy easing. Our preference here is now China rather than India,” UBS strategists said in a report on Friday. “With liquidity easing, economic stabilisation and attractive valuations, China is our biggest overweight,” they added.
The Reserve Bank of India (RBI) on Tuesday cut its key policy rate by 50 basis points, but warned that scope for further rate cuts was limited.
“We think India will struggle to outperform as much going forward as it did in Q1. We think there is a more table thumping call to be made on China,” UBS strategists said.
Interestingly, another foreign brokerage CLSA had cut its one-year Sensex target to 19,000 from 20,000 a day after the RBI monetary policy. “RBI’s more-than-expected 50 basis points rate cut will not be good enough to kickstart the sagging investment cycle in India, as the room for more sharp cuts appears to be limited with sticky inflation,” CLSA strategists had said in a report.
CLSA strategists, however, said even though they have turned less bullish on the India market due to adverse macro developments over the last few weeks (UP state election outcome, higher current and fiscal deficit and the general anti-avoidance rules issue, among others), they still expect 10-12 per cent market returns over the next one year, helped by valuations.
According to CLSA, the Sensex trades at 13.5 times its estimated earnings for FY13, which is an eight per cent discount to the last 10-year average and offers some cushion.