UBS says India's equity valuations are unattractive, double upgrades China

NEW DELHI: UBS on Wednesday said Indian stock valuations look unattractive. The foreign brokerage assigned an ‘underweight’ to India while double upgrading the rating for China equities to 'overweight'.

In a note, UBS said India, along with Taiwan and Australia, look unattractive, especially on the valuations front, even as it is positive on ASEAN.

The brokerage said Indian markets are expensive in valuation terms and are also seen fading of earnings momentum. It said that there is less scope for an economic rebound this year, even as domestic stocks have outperformed markets like Indonesia by 31 per cent year-to-date. Low real yield and expensive currency suggest some vulnerability for India in the tapering environment, it said.

“India, like Taiwan, looks very poor on our scorecard framework. The relative valuation of India to ASEAN, two areas with similar growth dynamics and occasional perceived macro vulnerabilities, looks too wide to justify,” it said.

UBS said that both in India and Taiwan, retail investors have played an outside role, which while difficult to predict in terms of reversing, creates an additional potential headwind if this demand unwinds.

The key question for India, UBS said, is how quickly can mobility restrictions ease and how long will the retail flows persist.

While it has taken ASEAN a while to get going, not least given the impact of Covid-19 variants and a slower vaccine roll out that we anticipated, UBS said it still think there's more to go in relative performance in the short-term, notwithstanding the risk of tapering

“We see even better relative performance versus extremely expensive India,” it said

In China's case, the upgrade is partly a function of UBS being willing to take a more forward-looking view on the market, especially regarding the impact of domestic policy - both monetary and regulatory, the brokerage said.

“We also recognise that two factors on which China scores less well - earnings momentum and relative PE valuations - may be misleading. On the former, assuming no changes in actual forecasts, the rollover effect of earnings growth will lift China's rankings, at the expense of the more cyclical markets that are currently looking good on this measure such as Japan and Taiwan,” UBS said.