Mumbai: The spectacular rally in equities is likely to lose steam this year, cautions UBS Securities India. It sees the Nifty at 10,500 by December 2018 implying no returns from the index this year, as retail support may fade in 2018, with demonetisation-led liquidity abating and in case interest rates rise.

“Our end-2018 Nifty target of 10,500 is based on 18 times one-year forward price-to-earnings, implying no returns from the index in 2018. Our upside/downside scenario assumptions for the Nifty of 11,900/8,800 do not offer an attractive risk-reward, but we remain positive on India over the long term," said Gautam Chhaochharia, head of India research; Sanjena Dadawala, analyst, and Tanvee Gupta Jain, economist, at UBS Securities India Pvt. Ltd, in a joint report.

This is in sharp contrast to estimates of other foreign brokerages, which are seeing a nearly 10% jump in Indian equities in 2018. Deutsche has set the Nifty target at 11,500 by December-end, while CLSA has raised its Nifty target for 2018 to 11,400 points. On Tuesday, both benchmark indices closed at record highs, with the Nifty at 10,637, up 0.1%.

Last year, Indian equities were one of the best performing markets among peers. In dollar terms, the Sensex rallied 36.02% last year which makes it the best performing index after Korea’s Kospi index, which rose 37.55%. However, UBS said that most of the market performance in 2017 was led by a valuation re-rating rather than near-term earnings revisions.

The brokerage firm expects earnings growth to disappoint against optimistic consensus expectation of 22% growth in FY19. “Top-down, we expect 10% cuts to consensus FY19 and FY20 estimates. We forecast Nifty earnings growth will recover from 9% in FY18 to 13% in FY19, driven largely by financials (provisioning cycle)," it added.

According to the brokerage firm, the government may turn populist this year with the 2019 elections in mind and policy inducement for near-term growth will be elusive while inflationary pressures may rise with a rural tilt, despite policy discipline. It expects GDP growth to recover from 6.6% in FY18 to 7.4% in FY19. However, though it remains positive on India due to structural reforms, UBS thinks that current drivers may not be sustainable and job creation may be the missing link for forecasts of overall macro and for consumption growth to be met.

“Upside scenario—we assume a credit cycle-driven recovery becomes visible with banks’ recapitalization aiding loan growth, and a faster capex recovery than in our base case. Downside scenario—we assume drivers of growth in select sections of the economy will wear off, and quicker fiscal consolidation and more anti-corruption measures would further drag on growth. This would imply slower earnings growth of 7%/10%/13% in FY18/FY19/FY20, market multiples de-rating to 16x and a Nifty value of 8,800," it said.