UBS warns of heavy equity outflows as pandemic woes mount
UBS warns of heavy equity outflows as pandemic woes mount

Foreign portfolio investors (FPIs) have pulled out USD 2 billion from Indian equities as they are getting fidgety amidst surging pandemic caseloads and are likely to withdraw USD 3-4 billion more in the short-term, warns a foreign brokerage.

FPIs had pumped in a record USD 39 billion in FY2020-21.

Owning USD 555 billion of the USD 2-trillion domestic equities, FPIs are the biggest market-makers and market-breakers in the domestic equity market.

Between September 2020 and March 2021, their marker ownership has jumped by a whopping USD 105 billion. At USD 39 billion of net investments in FY21, FPIs have surpassed their own records in FY10 and FY13 by a wide margin.

With valuations/EPS estimate stretched by 5-10 per cent and the risks to growth outlook rising amidst the pandemic, equity investors' positioning is a concern, Swiss brokerage UBS Securities said in a note on Wednesday.

The report further said in the past five weeks alone, FPIs have pulled out USD 2 billion and going by the weekly median of USD 3 million rolling inflows, they are on course to pullout USD 3-4 billion more in the short-term.

Worries are mounting given the fact that their inflows are highly correlated with the earnings momentum, therefore it can be surmised that most of the inflows into the country in spite of the falling valuations in the past decade can possibly be because of round-tripping related inflows, the note said.

If historical trends hold, the market could see USD 5-6 billion of equity outflows in the short-term, of which USD 2 billion have already been drawn down in the past five weeks alone. If valuations correct faster, the draw-down might be smaller, but equity valuations are slow to correct and the pandemic situation worsens, a larger pullout is in the making, the note warned.

On the Nifty earnings expectation, the report said the EPS estimate is already stretched by 5-10 per cent. FY22 EPS estimate of 727 for the Nifty is 23 per cent above UBS' top-down estimate of 590 or 53 per cent above FY21 estimate of 479, the report added.

"We estimate this forward bullish bias to be around 17-18 per cent based on two simple observations: over the last 13 years, Nifty consensus EPS measured at the beginning of the year overestimated the realized EPS by average 20 per cent and secondly even on the last trading day of the year, about half of this premia is remained.

"In short, we think it's fair to assume that market's true estimate of FY22 EPS is 619 which is still 31 per cent above FY21 estimate. However, even this adjusted estimate is around 5 per cent above UBS' top-down estimate of 590 or 10 per cent above historical trend growth assuming 8 per cent annual growth between FY20 and FY22," the note said.

With fresh lockdowns and higher commodity prices, this premium is at risk. Valuations are gradually normalizing vis-à-vis broader emerging markets and bonds.

However, the report is quick to note that the market downside may be limited as vaccination ramp up should provide downside support.

Thus, our 12-month forward Nifty target of 15,500 implies an 8 per cent upside, simply because of the base case assumption of vaccines working in the country. P

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