FIIs overweight on India, but trimming some positions: UBS

Mumbai: Foreign institutional investors (FII) remain overweight India in general, but there is some trimming of their positioning in India, UBS said in a Monday note after meeting nearly 100 investors in the US, European Union, Asia over the last month.

Investors also displayed mild disappointment with the Narendra Modi government with respect to the pace of reforms and particularly recent tax issues, UBS said.

FIIs’ net selling of $2.5 billion, (even after adjusting for the big Sun Pharmaceutical Industries Ltd stake purchase) in cash equities since mid-April doesn’t appear to be material given overall 2015 net buying of $3.9 billion, UBS Securities India Pvt. Ltd said. It pointed out that FIIs net bought around $20 billion and $16 billion of India shares in 2013 and 2014, respectively.

On the derivatives side, FIIs appear to have reduced longs and/or increased shorts since mid-April, UBS said.

“Our meetings also indicate that nearly all the FIIs remain positive on outlook for Indian markets, in both absolute and relative terms, though their time frames may differ. Positioning is definitely not light, neither through actual selling nor in terms of investors’ expectations,” UBS analysts Gautam Chhaochharia and Sanjena Dadawala said in the note.

According to UBS, investors are clearly more amenable to their long-held view that this recovery cycle is going to be muted and gradual, with a significant increase likely only in 2016-17, while some investors do still harbour hopes of a sharp recovery in the second half of 2015-2016.

UBS said that its long-held view that inflation is not structural, and that there is a strong disinflation process underway which will help drive sharply lower interest rates–200 basis points (bps) lower interest rates in less than two years—continues to face resistance among many investors, and said this is not surprising given continued non-dovish commentary from the Reserve Bank of India (RBI).

One basis point is one-hundredth of a percentage point.

“Investor resistance to our rates view indicates that this could be a significant positive catalyst for markets, especially if it exceeds the 25-50bps consensus expectations over next 12 months,” UBS analysts said adding that Indian markets’ recent correction reflects reset of growth trajectory expectations and also makes risk-reward more reasonable.

UBS expects further cuts to earnings estimates top-down, and said its top-down Nifty earnings growth forecasts for FY16 and FY17 are 10% and 18%, respectively against the Street forecasts of 16% and 20%, respectively.

UBS said its long-held underweight positioning in rural focused sectors—such as two-wheelers and specific consumer staples—appears to be a consensus view among these investors, and said Hero MotoCorp Ltd and Hindustan Unilever Ltd (HUL). continue to be its least preferred stocks.

“Our topdown view of banks benefitting from lower interest rates is still eliciting mixed response, with over-riding concerns on stressed assets, though positioning appears quite heavy in private banks,” UBS said adding that HDFC Bank Ltd, LIC Housing Finance Ltd and State Bank of India are its most preferred stocks.

UBS’ overweight positioning on the pharma sector also faced resistance given sharp re-rating over the last few months, and said Sun Pharmaceutial Industries is its most preferred stock, while its remains underweight IT sector with no buy-rated stocks, though some investors see valuations as reasonable post recent sell-off.