UBS Cuts 2023 Nifty Target By 4% To 18,000 As Retail Inflows Ebb

Citing fast-ebbing household inflows into equities, whittling down foreign inflows, and rising bank deposit rates, a foreign brokerage sees a 4% downside to the Nifty target at 18,000 points for the next year from the current levels.

After a massive blood bath last week, the Nifty closed at 18,452, gaining over 151 points, on Monday.

The Nifty target for December 2023 is 18,000 points, a full 4 percentage points downside to the current levels, as India is among its top underweight markets in the emerging market space in 2023, the Swiss brokerage UBS Securities' India Strategist Sunil Tirumalai said in a report on Monday.

The brokerage further said it sees the Nifty upside at 19,700 and downside at 15,800 and base case is 18,000, down 4% from the current market.

The brokerage does not offer a target for the benchmark Sensex.

He expects the Nifty EPS to see 10.5% CAGR over the next three years, a tad lower than the 11% CAGR in the previous five years on receding inflationary pressures, which is offset by slowing macro and commodity sectors coming off peak earnings.

More than earnings, he said, the trajectory of the market will be influenced by valuations in the next 12 months.

Due to support from domestic flows, domestic equity valuations have re-rated significantly, with India is still trading at a 90% premium to emerging markets even after recent underperformance to China, he said.

"As household flows recede, we expect valuations to normalise," he said, adding, "Their PE target is still 7% above long-term average as we expect the markets to also enjoy some tailwinds from global rates easing in H2 of 2023."

According to UBS, the massive fund inflows to the equities, which began from June 2020 with tens of millions of first-time investors entering the market, had peaked at around Rs 1,40,000 crore in March 2022, and have then plunged to around Rs 32,000 crore in September 2022. During the same period, Foreign Portfolio Investors' inflows were in negative at around Rs 1,50,000 crore and over Rs 40,000 crore, respectively.

Similar is the story of fund inflows from households into equity mutual funds, which has also lost steam of late, and began to slow down steadily but remains positive unlike direct stock purchases. This mode of inflows, after peaking at around Rs 60,000 crore in March 2022, have fallen to under Rs 30,000 crore in September.

On the ebbing household inflows, he said, the current wave of household inflows could recede, pulling down valuations.

"We are already seeing early but clear signs of fatigue in household allocations to the market. These trends reveal the high sensitivity of household flows to domestic bank deposit rates that have just started inching up. We believe these deposit rates could go up further meaningfully, given the context of loan-to-deposit ratios and healthy credit growth of banks," he said.

Tirumalai added that India is among their top underweight markets in the emerging market space.

Its pessimism about the domestic market also comes from the rising level of rural stress, which he pithily put as "we are not even certain if there is an agreement on 'rural stress' as far as the listed corporates are concerned. The view depends on who you ask. Or rather which part of the 'rural' you seek an answer from."

It goes on to note that while FMCG major HUL has been flagging rural weakness for a few quarters now, the management commentary from several other companies suggests they find nothing lacking in rural demand or sentiment. Interestingly, even managements from the same sub-segments like paints have very different opinions on rural demand, Tirumalai said.