By laksh5382 
“In relative terms, we remain underweight on India given weak valuations and weak earnings,” says Gautam Chhaochharia, head of global markets at UBS Securities. He says the market has declined but is still up meaningfully from a year ago. Here are edited excerpts from the interview:
There has been a lot of growth in American markets in the last two years. What is the outlook for the coming year? What impact will rising bond yields have on equities?
Our global equity strategist has upgraded the US to benchmark weight. The US is the place to be when global growth falls below 3.5 percent because it has the lowest operating leverage, the most flexible labor market and a dual-mandate Fed.
America has estimated global GDP to be 2.9 percent in 2025. Trump will support tax cuts, de-regulation, and a policy of helping America disproportionately compared to its peers. However, much of Trump’s ‘hope’ may have come at a cost; Valuations across the board are at new highs compared to global markets; US growth is projected to slow to 1.9 percent in 2025 from 2.7 percent in the third quarter, while European and Japanese growth may accelerate modestly.
What impact will Trump’s victory have on the trade and geopolitical environment between the countries?
We expect global growth to slow by more than half a percentage point over the next two years (from 3.2 percent to 2.6 percent).
This is partly because we do not think the US can move at this pace and mainly because we expect US tariffs to hurt the already weak Chinese economy. India should be one of the least affected countries comparatively, but not completely unaffected, especially in terms of global development impact.
Where do you see opportunities in emerging markets amid the current economic uncertainty?
Slower global growth, global tariff/trade war risks and other US policy risks, and the prospects for a stronger dollar are all headwinds to EM performance relative to the US.
It’s hard to argue that EM valuations are cheap when multiples are close to pre-Covid peaks – and there are clear risks to US yields staying elevated for a longer period of time and spreads rising. Our Global Strategy team prefers the US and Europe over emerging markets, while China remains predominantly overweight.
What is your outlook for Indian equities? How does the country compare to other emerging markets?
oue EM/APAC strategists remain underweight on India in relative terms. The market has declined but is still up meaningfully from a year ago. The key to the market recovery has been weak earnings more than anything else.
This is especially so in the context of rich valuation. Markets were expecting a weak 2Q earnings season, but the actual figures turned out to be worse than these weak expectations and estimates were cut further, across almost all sectors.
It is difficult to separate the impact of elections in early 2024 from other factors in this quarter’s weakness. However, we note that the slowdown in reported topline growth for Indian equities has continued for more than three quarters.
We also highlight that nominal GDP growth – which matters more to stocks than real growth – has been running in the bottom quartile of the last 15 years. However, India remains the leader in terms of long-term growth prospects and investors still see attractive bottom-up opportunities in India.
India’s stocks appear expensive, with price-to-earnings ratios much higher than its emerging market peers. What is your view on valuations for Indian equities at this time, especially after the correction we saw in October?
India has always traded at a premium to EMs but this time it is much higher. This reflects high expectations for relative long-term growth and also reflects strong local inflows supporting the market. After the correction in October, there were signs of bottoming out in terms of foreign inflows and investors were again looking for bottom up ideas.
At the moment I wouldn’t be concerned about individual valuations – policy trajectory and growth going forward will probably matter more. These include policy in terms of rates and liquidity stance as well as fiscal expenditure. Undoubtedly, the reform agenda will be important as it will help sustain India’s growth over the long term.
India saw FPI outflows of over Rs 1 lakh crore in October. What are the prospects for further FPI inflows, especially given Trump’s victory and Fed’s interest rate cuts?
India is better positioned among emerging markets in terms of the impact of the US policy outlook, although this may also impact valuations as markets await the outcome. Many investors in the market point to the record FPI outflows a few weeks ago.
However, let’s not just look at these numbers in absolute terms, but also in terms of percentage of market cap or percentage of their holdings. Sales in these conditions are off the charts.
Indian companies’ earnings growth has so far been sluggish in the second quarter, with earnings seeing the biggest decline since the beginning of 2020. How concerned should we be and how will this affect the markets going forward?
That FY25 is a weak earnings year is now well understood and can arguably be priced in. However recent disappointments have caused some trepidation.
The key remains perspective beyond that. The policy stance of both the RBI and the government, a big boost to the reform agenda and ultimately the political economy after the upcoming state elections – this is what will drive the income growth outlook.
At the moment the market is seeing some relief on earnings improvement and there are data points to support it. Our base case is for earnings growth to recover in FY26.
Are there any sectors you are bullish on?
Given the recent market correction and growth concerns, we believe this has now become a stock specific market rather than a broader sector level thematic approach. Our strategists prefer defensive exposures such as consumer goods and IT services and are wary of leveraged consumption (discretionary), and will be selective across banks and industrials.
China has recently come into the limelight again after seeing new interest from foreign investors amid the stimulus measures announced by its government. Is this a temporary phenomenon or do you think the “buy China” trade will continue?
China remains a key actor for our EM strategists. Despite continued broad weakness, the fundamentals of companies in MSCI China remain intact, with shares supported by dividends and buybacks.
We keep a close eye on more policy stimulus, especially in view of potential 60% tariff risk from the US – but acknowledge that only monetary policy can bring meaningful upside to China stocks. Valuations remain cheap.
Published on December 17, 2024