UBS Downgrades India Equities Citing Expensive Valuations

Strategists at UBS downgraded Indian equities citing a valuation gap with Asean markets even as the research firm upgraded China.

The relative valuation of India to Asean, the two areas with similar growth dynamics and occasional perceived macro vulnerabilities, looks “too wide to justify”, UBS said in an Oct. 20 note. The firm calls India “extremely expensive”.

In India and Taiwan, retail investors have played an outsized role, which while difficult to predict in terms of reversing, creates an additional potential headwind if the demand unwinds, it said. India, like Taiwan, ranks poor on UBS' scorecard framework.

Indian equities have surged to records as investors, domestic and foreign, piled into stocks. The benchmark Nifty 50 is up nearly 31% so far this year, making it the best performer in Asia and among major global peers.

While Asean markets have taken time since UBS turned bullish on them, given the impact of Covid-19 variants and a slower vaccine rollout, the research firm expects them to outperform relatively in the short term, despite the risk of tapering.

But India is not alone to be downgraded in Asean.

UBS said its major thematic call from mid-2020 through mid-2021 was to be overweight on cyclical markets in the region. Since early summer this year, the firm has been gradually backing off that call as various cyclical data peaked and valuations reached expensive levels.

It's already underweight on Taiwan and has now cut Australia to ‘underweight' with materials among its least-preferred cyclical sectors. And it brought Japan and South Korea to ‘neutral'.

While Japan benefits from a better exposure to business capex, valuations are a concern, UBS said.

China Upgraded

In 2020, while a recovery was underway in China, its expensive market faced tighter monetary policy. Meanwhile, the rest of the region offered better cyclical recovery prospects and more attractive valuations, UBS said. Sixteen months on, they have reversed that call.

A tighter policy is working through the economy, most notably in property in China. Relative earnings which have been very poor this year should bounce back in 2022, along with relative valuations, as cyclical upgrades in the rest of the region fade and weak earnings in Chinese internet stocks abate, UBS said.

UBS sees Chinese growth troughing and improving sequentially from here, while global growth is likely to slow progressively through 2022.