The Nifty 50 index may take a pause in 2022 after having posted a strong 23% rally in 2021, said global brokerage and research firm UBS AG. Analysts are of the view that valuations of domestic markets are still lofty and do not fully reflect the upcoming headwinds. Domestic markets have outperformed emerging markets and developed markets in 2021, extending a bull run that started 22 months ago. Nifty is currently hovering around 17,700 while Sensex is above 59,400, both down nearly 5% from their all-time highs, achieved in the previous calendar year.
Valuations still rich
“India’s stock market left most Emerging Markets and even Developed Market counterparts in the dust during 2020 and especially 2021. That said, and the structural appeal of the Indian market notwithstanding, we believe in the near term the Nifty is due for a pause, and may even ease in the early part of 2022,” UBS AG analyst Hartmut Isse wrote in the note. He added that the key reason behind his analysis is the still lofty valuation premium. Although Nifty valuations are down from the highs of last year, analysts believe a further pull-down is needed.
Another factor leading to the bearish view held by UBS AG is the recent inflow trend. In recent weeks, Dalal Street has been led by domestic retail investors rather than Foreign Portfolio Investors, who were the primary force earlier. Hartmut Isse of UBS AG has expressed concern that these inflows may stop if markets no longer exhibit a steady rise, and higher bank deposit rates pose a threat.
Although UBS AG predicts a pause in Nifty’s momentum, a strong correction is not seen to be on the cards. “The earnings growth of 28.3% for FY22 and 11.7% for FY23 works as a partial counter-force and will likely help to prevent a strong correction. At the same time, we stress that as is often the case, consensus estimates look implausibly high to us,” they added.
Betting on financials
The Bank Nifty index has underperformed the benchmark Nifty 50 in the last 6 months. While Nifty 50 is up 11% in the 6-month time period, the Nifty Bank index has managed to gain only 4%. “So far, financials have lagged the broad market. It is clear that the improving asset quality has been priced. However, we do expect an uplift for the sector, both for banks and non-banks as system loan growth should recover to the tune of 10% or so,” UBS AG said in the report. They added that as interest rates improve, the net interest margin for financial companies should also have room to rise.
Analysts expect large private sector banks such as Axis Bank, HDFC Bank, and ICICI Bank to outperform their peers. For PSU Banks, upcoming elections in various states is seen as a concern but any effect is expected to be temporary.
Stocks to watch
UBS AG has Axis Bank, Bank of Baroda, HDFC Bank, ICICI Bank, ICICI Lombard General Insurance, L&T Finance, and Mahindra & Mahindra Financial in their preferred stock list. Kotak Mahindra Bank is the only large private bank kept in the least preferred stock list by UBS.