As retail investors lose faith in stocks, UBS sees negative returns in 2019

NEW DELHI: Dalal Street seems to be factoring in strong earnings, sustained retail inflows and a second term for the Narendra Modi government, but reality may turn out to be different.

Data suggests inflows into equity mutual fund schemes – which derive 87 per cent of their assets from individual investors -- more than halved in December to Rs 4,487 crore against Rs 11,005 crore sequentially.

Earnings may rebound but fail to meet tall consensus estimates. Besides, there looms uncertainty over forthcoming general elections.


Risk-reward has turned unattractive for Indian stocks, foreign brokerage UBS said, while expecting Nifty50 to test 10,000 by December-end.

Retail flows likely to slow down
Data suggests that even if we exclude arbitrage schemes, inflows into equity schemes dropped 23 per cent month-on-month to Rs 6,700 crore in December.

Local flows follow market returns. But the market performance (Sensex up 4 per cent, midcap index down 16 per cent, smallcap index down 25 per cent) in the last one year is anything to boast of, risking retail outflows.

“The one-year return is in the low single digits (negative for midcaps), which may lead to a further slowdown in retail flows -- this is already visible in the latest flows data,” Gautam Chhaochharia, Analyst at UBS Securities, said in a note, while suggesting an unattractive risk-reward for markets.

The analyst said his discussion with investors suggest the market may be pricing Modi’s coming back in the forthcoming general elections. The market might already be penciling in a sharp earnings recovery and sustained retail flows, he said.

Dose of populism key to 2019 win?
In a separate note, the UBS argued that populist measures by states do not always bring votes in general elections.

It cited the case of 2009, when loan waiver announced by key states in 2008 yielded no clear improved results for Congress in the general elections, vis-à-vis other states, which did not have any material waivers.

This was also the case for states with high spending on National Rural Employment Guarantee Act (NREGA) then, it said.

Earnings to belie tall consensus expectations, again?
Besides analysts expects FY20-21 earnings growth of 25 per cent and 18 per cent, respectively, look too tall. UBS does expect double-digit earnings, but at 16 per cent and 14 per cent growth for the said years, implying a 9 per cent cut to FY20 estimates.

“Likely earnings cuts and waning support from local flows/local financial conditions may also be an overhang on market multiples,” the brokerage said.

Eyes on post-election narrative
So far, the market believes that the recent build-up of a populist narratives is nothing but pre-election phenomenon.

The narrative around reforms has is believed to have supported rich valuations in India over the last four years, despite years of earnings cuts.

“Potential structural challenges facing rural India and populism's unclear role in deciding electoral outcomes imply that the post-May 2019 narrative will be key for 2019 performance,” it said.