Foreign Funds Not Jumping In, Brent Holds The Key: UBS' Chhaochharia

Foreign long-only funds, which buy and hold stocks without betting against them, are studying Indian companies one by one but are not yet putting big money to work, according to Gautam Chhaochharia, Head of Global Markets, India, at UBS.

Speaking to NDTV Profit, Chhaochharia said the shift has been visible over the last 2-3 months, including at UBS's recent investor conference. "We have seen foreign long-only investors looking at bottom-up ideas in India, and exploring, not jumping in, is a way I will put it," he said. Bottom-up ideas are stock-specific picks based on a company's own fundamentals.

He said earnings have picked up and macro growth has stayed resilient despite the uncertainty, which has lifted confidence compared with last year. "It is not as bad as last year," he said. But the relative picture has not turned. "India is still not able to deliver earnings growth in a relative sense much better than the rest of, say, EM," he said, referring to emerging markets. India used to beat the rest of the group on earnings, he said, but has not done so for the last two years, primarily because of tech.

UBS's emerging markets equity strategist has stayed underweight on India, meaning he holds less than the benchmark weight, since early last year. Valuations have cooled but remain on the rich side. "Still early days for him to turn overweight India," Chhaochharia said.

Brent Holds The Key For Indian Markets

Uncertainty around global markets remains elevated, he said, with the Middle East, oil prices and the US midterm elections all in play. "I don't think it goes away for the next couple of months," he said.

Brent crude, the global oil benchmark, sits at the centre of it. "The next two-three months, how Brent behaves is a big, big factor," Chhaochharia said. "The longer it stays higher, it obviously hurts India's macro and then will be an overhang on the markets."

Markets, he said, are not positioned for a sharp move in oil. "I don't think markets are ready for Brent touching much higher levels than what we are seeing today. If that happens, there is downside for the markets, for sure."

Nor is a peace deal likely to change the mood quickly. Markets are pricing in neither a big escalation nor a resolution, he said, and with a resolution having been talked about before, sentiment will need more to turn. "It will need more than just a simple announcement for markets to get confidence."

At home, heavy fundraising is adding to the pressure. "In India we have also seen a lot more activity in capital raising, which is also creating an overhang on the liquidity locally," he said.

On the sell-off in financials, Chhaochharia said it is a mix of factors. Large private banks are already heavily owned by large-cap investors, including foreign institutional investors, and that plays a role. Management changes at two or three of them are also on investors' minds. Rate hikes help banks over time, he said, but could create near-term uncertainty over how they flow through to earnings.

Faster growth elsewhere in the sector is also drawing money away. "We still have the non-bank financials which are delivering faster growth, or some of the smaller private banks delivering faster growth, rather than the larger private banks," he said. "That's another reason why these banks are taking time to perform."

For investors deploying fresh money, Chhaochharia sees room to act, with a caveat on tail risk. "No one can predict the tail risk scenario of a real escalation," he said. Barring that, "there is enough comfort to bet on bottom-up opportunities", both in individual stocks and in sectors where the impact of these uncertainties is lower. He pointed to electrification as one such theme and also cited pharma, consumer and financials, including private banks, where he expects minimal impact from global and local macro. "There is risk-reward opportunity in that," he said.

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