Don’t be complacent with stocks rally; UBS says FPI backlash may cut gains

MUMBAI: The Indian equity market has been the third-best performer in all of Asia over the past 12 months with 59 per cent returns, but a fierce second Covid-19 wave could see foreign investors pull out as much as $5 billion in the coming months.

Brokerage firm UBS Securities India reckons that the recent foreign outflows from India could touch the $5 billion mark, as the Indian equity market undergoes a correction due to the risk to earnings growth from the second Covid wave.

“If valuations correct faster, the drawdown might be smaller; but if equity valuations are slow to correct and Covid-19 situation worsens, we could see a larger drawdown,” UBS Securities said in a report.


So far, Indian equity market has seen close to $2 billion in foreign outflows, as the country battled the most severe wave of infections seen anywhere in the world since the pandemic began. The country has reported over 3,50,000 daily cases in the past few days with daily deaths surging to over 3,000 – a pandemic high.


Renewed lockdowns in several economically large states such as Maharashtra, Delhi, Karnataka, Tamil Nadu and Uttar Pradesh have triggered downgrade of GDP and earnings growth estimates by sell-side analysts.

Downgrades to earnings expectations so far have been mild given the market’s perception that the second wave will be shortlived but more violent and the government’s reluctance to enforce a national lockdown on the lines of the one imposed last year.

Brokerage firm CLSA Asia-Pacific Markets said the peak of daily caseloads in India should come around June, which combined with acceleration in vaccination should allay concerns of COVID-19 restrictions staying in place beyond the June quarter.

That said, the risk to earnings downgrades in India remains high given that even at current levels UBS Securities believes earnings growth expectations of Dalal Street are at least 5-10 per cent higher. Currently, consensus earnings per share estimate for Nifty50 companies is around Rs 727, which is 23 per cent higher than UBS Securities’ own estimate.

“While news flow on the Covid situation remains grim, the encouraging developments on vaccine rampup should provide downside support,” UBS India said.

The brokerage, however, flagged that Indian stock market is highly sensitive to global liquidity, suggesting that any signs of US Fed’s bond tapering could compound the problems for local investors.