In a major change in portfolio stance, international brokerage house UBS has highlighted that they have upgraded India to Neutral. However, they still prefer China over India. This is because they see better risk-reward in China within the EM basket. According to UBS, China offers “better defensiveness, lower valuations, potential upside from stimulus/domestic flows.”
UBS upgrades India to Neutral
UBS highlighted that India ticks a lot of the boxes including
-High domestic focus
-EPS resilience even in extreme events
-A beneficiary of lower oil prices
That apart UBS pointed out that the the other key positives for India include “banks’ willingness to cut deposit rates despite weak deposit growth.” They explained that this is important because it can support retail equity flows for longer and potential government support for consumption.
Why does UBS prefer China over India
However, that said UBS also specified that they prefer China over India in the overall EM basket on better risk-reward potential. That’s also a reason why they have not put Overweight call on India.
Lacklustre stock market fundamentals: According to UBS, India’s “stock market fundamentals are still lacklustre.” The other key concern is that it is sill unclear whether “government focus is returning to growth/investments anytime soon.”
India valuations still high: They also pointed yout that India’s valuations are still significantly higher” than historical averages.
How much can India benefit from supply chain shifts: Moreover, according to UBS, it is hard to conclude whether “India is a winner in supply chain shifts. We would also watch trade negotiations, especially on sensitive areas like farm products and retail.”
Tactical move to domestic and defensives
Outlining a portfolio shift, UBS highlighted the possibility of the rest of the world decoupling from past relationship with US assets and said they have decided to “tactically move domestic and defensive in our market positioning – we upgrade Indonesia to Overweight and India to Neutral.”
UBS is realigning its market selection framework to themes “that suit the current scenario of trade uncertainties.”
They have indicated that their preference is for markets that show attractive fundamentals while satisfying key characteristics including
-EPS resilience to GDP slowdown: EPS less affected by mix of changes in UBS GDP forecasts post US tariffs
-Domestic-focused: Low US/high domestic topline exposure at the index level
-Defensive: Most resilient EPS trends over 15 years (They are focussing on EPS stability Vs dividend yield as an indicator of ‘defensiveness’)
-Beneficiary of lower oil prices
Overall UBS now has a bullish bottom-up view. The brokerage house recommends “focusing on sectors that have historically weathered storm with limited earnings decline – in most markets they include staples, IT services, retail, banks and utilities.” The entire list of banking stocks and information technology stocks have been in focus recently in the Indian markets as well.
Can EM equities benefit from capital flows out of US?
The UBS global strategy team sees better outlook for EM equities compared to US markets and the S&P 500 only in ‘no’ tariff scenario. With over 35% of MSCI EM topline coming is from exports/external sales (of which 13% to US), they see tariffs as a big risk.
The UBS consensus “still forecasts 15% 2-year EPS CAGR Vs 11% in the last 3 years. Valuations are still in-line with 10-year historical averages ex-Covid. In particular, EM valuations are highly sensitive to US high yield corporate bond spreads (100 bps widening historically leads to 1.4x drop in PE).”