Foreign Institutional Investors remain overweight on Indian markets on recovery hopes in the second half of the current fiscal as well as long-term growth outlook, says a UBS report.
It said the UBS meeting with over 80 investors in the US, European Union and Asia over the last month showed that nearly all FIIs remain "positive and overweight on Indian markets and appeared to be not worried about the 'overweight' position or about rich valuations".
Various factors are responsible for this bullish investor outlook on Indian markets like hopes of a growth recovery in the second half of this fiscal; confidence about reforms (GST) helping long-term growth outlook for India; attractive relative growth and lower rates justifying higher valuations.
Investors in the US and EU, drove comfort from attractive relative growth and lower rates justifying higher valuations, while those in Asia/India were also sanguine on hopes of a growth recovery.
Hopes for second-half recovery remain high among investors, driven by Central Pay Commission wage boost in urban India and good Monsoons in rural India, according to the report.
It said Nifty risk-reward ratio is unattractive and cuts to earnings estimates likely ahead.
"While earnings should recover mildly in FY17E-18E; we expect cuts to consensus Nifty earnings estimates as H2FY17 growth disappoints," the report said.
UBS expects Nifty base case at 8,000, upside 8,800 and downside scenarios at 7,000 for 2016-end.
For 2017 end, Nifty base case is 9,400, 10,600 (upside) and 7,300 (downside), implying unattractive risk-reward near-term.
The report noted that upcoming state (Uttar Pradesh) elections in 2017 are also emerging as an area of interest but mostly for Asia/India investors.
On the Reserve Bank's policy stance, UBS said the strong disinflation process which is under way will help drive sharply lower interest rates with some investors expecting sharper cuts (100bps) ahead.
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