RIL To JSW Steel: UBS’ Top And Least Preferred Bets As It Expects Nifty To 'Pause'
UBS expects the Nifty to “pause” in the near term and “even ease in the early part of 2022”.
UBS expects the Nifty to “pause” in the near term and “even ease in the early part of 2022” after the domestic equity benchmark beat emerging and developed market peers in the last two years.
“A key reason is indeed the still lofty valuation premium,” the Swiss research house said in a Jan. 3 note. Rising interest rates globally and in India, and the return of the nation’s current account deficit are among other headwinds. “These may affect not only the country’s stock market, but also the rupee.”
The earnings growth of 28.3% for FY22 and 11.7% for FY23, according to UBS, works as a partial counter-force and will likely help prevent a strong correction. “At the same time, we stress that as is often the case, consensus estimates look implausibly high to us.”
Another “potentially bearish” aspect of the markets is the lopsidedness of recent inflows that have kept the market afloat, the report said. “They are now derived almost exclusively from domestic retail investors. The past, however, has shown that this type of flows can stop when markets no longer exhibit a steady rise, and potentially higher bank deposit rates could become a potent competitor again when the Reserve Bank of India starts to hike interest rates.”
UBS’ Top Picks
UBS has picked certain themes and stocks that could still deliver growth.
Financials, it said, should come to the fore on the back of rising loan growth, coupled with expanding interest margins. “We continue to like large private sector banks such as Axis Bank, HDFC Bank and ICICI Bank and expect them to outperform peers. With a number of state elections in the offing, the risk for voter-friendly measures at the expense of PSU banks in particular cannot be ruled out entirely, but this should only affect markets temporarily, if at all. In sum, we expect financials to outperform the broad market in 2022.”
The research house also prefers cyclical stocks in vehicle, cement and construction. “Materials stocks on multi-year high valuations will likely underperform as some supply tightness eases.”
The huge opportunity, it said, is in green energy transition. This presents large corporations the chance to invest in this space. “Reliance has announced plans for a large-scale investment in new energy and new materials. Entry into this segment provides it with an early-mover advantage as there are no major players yet.”
UBS particularly likes Reliance Industries Ltd.’s long-term strategy and execution capabilities, and expects it to gain traction from its entry into green energy.