Indian Stocks May ‘Consolidate,’ Add Cash, UBS Says

June 18 (Bloomberg) -- Indian shares, Asia’s second-best performers this quarter, may “consolidate” following a 57 percent gain in the benchmark stock index, UBS AG said.

The brokerage has turned “less bullish” because further gains will be limited and as companies take advantage of the rally to sell stocks, analysts Suresh A Mahadevan and Navin Gupta wrote in a report today. UBS is increasing the cash component in its model India portfolio to 5 percent and raising the weighting of so-called defensive shares including health- care and telecommunications companies, they said.

The Bombay Stock Exchange Sensitive Index’s surge this quarter makes it the fifth-best performer globally among the 89 benchmark indexes tracked by Bloomberg. In Asia, only Vietnam has advanced more.

“Over the medium term, we believe fundamentals and liquidity are likely to support higher valuations,” the analysts wrote. “However in the short term, given the sharp rally, we expect the market to consolidate.”

The brokerage raised its March 2010 target for the Sensex to 16,750 from an earlier forecast of 13,500, the report said. That’s a 15 percent gain from yesterday’s close.

The estimate is based on a price-to-estimated earnings multiple of 14.9 times, UBS said. The benchmark index is currently valued at 14.7 times next year’s earnings, according to data tracked by Bloomberg.

Cash, Drug Stocks

Investors should now hold 5 percent of their Indian portfolio in cash and place 1.5 percent of their funds in pharmaceutical companies, after previously allocating a zero weighting in the two, according to UBS’s model portfolio. The brokerage raised its weighting for so-called consumer staples shares to 7.5 percent from 4.7 percent.

UBS boosted technology services to “overweight” from “neutral,” saying an economic recovery in the U.S. and Europe and a consolidation will drive further gains for IT companies. The “underperformance” of telecommunications companies including Bharti Airtel Ltd. prompted the brokerage to upgrade the industry, the report said.

To fund the changes, investors should reduce their holdings in metals and engineering companies after a rally in the shares, UBS said.

They should cut their holdings in Reliance Industries Ltd., India’s most valuable company, as refining margins decline amid increased capacity, UBS said. The brokerage today cut its rating on the stock to “sell” from “neutral.”