The Swiss financial services major in its base target pegged Nifty50 at 10,500, virtually where it was on Wednesday, and said the government is likely to turn populist this year, with 2019 General Elections in mind.
Most of the market performance in 2017 was led by a valuation re-rating rather than near-term earnings revisions, the Zurich and Basel co-headquartered company said, adding that supportive local retail flows may fade in 2018, as demonetisation-led liquidity abates and if interest rates rise.
In client note, the investment bank said Nifty50's earnings growth is likely to recover from 9 per cent in FY18 to 13 per cent in FY19 led by a change in provisioning cycle for banks, but that is likely to disappoint investors against consensus optimistic growth forecast of 22 per cent growth for FY19.
This implies a likely 10 per cent cut in earnings estimates, it added.
"A goldilocks scenario of a sharp earnings recovery, but with continued robust macro stability (benign inflation and currency rates) appears priced in," it said.
The brokerage has an upside target of 11,900 for Nifty50 and a downside target of 8,800 for the index, and said India remains a stock picker's market.
"Our upside/downside scenario assumptions of 11,900/8,800 for the Nifty suggest a bigger skew to the downside, implying unattractive risk-reward, though more balanced than our expectations in past years. For forecasts of overall macro and consumption growth to be met, current drivers may not be sustainable and job creation may be the missing link. On a longer-term basis, we remain positive on India due to structural reforms," it said.
The brokerage remains overweight on private banks, property, oil & gas, telecom, IT services, and auto component sectors, while it remains underweight on cement and infrastructure spaces.