UBS has revised its emerging markets equity strategy, shifting to a more defensive and domestically-oriented approach amidst growing trade uncertainties. The global brokerage has elevated India’s status to ‘Neutral’ from ‘Underweight’, whilst maintaining its favourable stance towards China within emerging markets.
The step forms part of a broader strategic shift favouring markets characterised by stable earnings, domestic revenue streams and defensive attributes. UBS notes that whilst India demonstrates several positive characteristics—strong domestic focus, robust earnings even during crises, and benefits from reduced oil prices—these factors are insufficient to warrant an ‘Overweight’ position.
The firm has strategically moved away from globally exposed investments towards markets dominated by local dynamics. Their evaluation framework now prioritises markets displaying earnings per share stability, minimal exposure to global trade disruptions, and positive analyst perspectives. Within this framework, China and Indonesia present more attractive investment destinations.
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The upgraded Indian position reflects recognition of its fundamental strengths, although UBS remains measured in its approach. The brokerage maintains China’s superior positioning over India supported by four key considerations:
1. Corporate Performance Remains Weak
UBS expresses concerns about India’s corporate earnings scenario. The analysis indicates weak stock fundamentals, highlighting significant reductions in earnings per share (EPS) whilst noting a disparity between positive macroeconomic discussions and actual earnings performance.
2. Uncertainty in Reform Agenda
Despite India’s political stability and robust domestic narrative, UBS indicates uncertainty regarding “whether the government focus is returning to growth/investments anytime soon”. This suggests that additional clarity might be necessary before market reassessment.
3. Supply Chain and Trade Considerations
UBS maintains reservations about India’s position in global supply chain reorganisation. The organisation monitors India’s trade discussions, particularly regarding farm subsidies and retail sectors. These aspects could potentially create policy complications or delays, possibly affecting market performance.
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4. Valuation Concerns
The valuation aspect presents significant challenges. UBS indicates that India’s trading levels are “significantly higher than history”, reducing its appeal when considering risk versus reward, particularly compared to regional alternatives. Nations like China and Indonesia present more defensive positions, lower valuations, and possible benefits from stimulus measures or foreign investment returns.
(Disclaimer: Recommendations and views on the stock market and other asset classes given by experts are their own. These opinions do not represent the views of The Times of India)
