UBS upgrades India to 'Neutral' but finds better risk-reward in China as playbook bets on domestic themes

UBS turns cautious on India, prefers China within EM

UBS has upgraded India to 'Neutral' from Underweight stance in its Emerging Markets and Asia-Pacific equity strategy note, however, it finds better risk-reward opportunities in China within the pack.

Despite India checking multiple strategic boxes - such as low external dependence, resilience in earnings even during global slowdowns, and potential support from lower oil prices - UBS believes the investment case for India has softened in the near term.

While positive catalysts such as easing deposit rates and government's consumption support exist, UBS sees better risk-reward opportunities elsewhere in the region, especially China. “We prefer China over India within EM given its better defensiveness, lower valuations, and potential upside from stimulus or domestic flows,” the note said.

The shift is part of a broader tactical repositioning by UBS’ global strategy team, which now favours defensive and domestic-driven markets in an increasingly uncertain global landscape.

What’s holding India back?

According to UBS, there are four key factors behind weighing on its India view:

Weak earnings outlook: Stock fundamentals remain soft, with continued earnings per share (EPS) downgrades weighing on sentiment.

Policy uncertainty: The note said it remains unclear whether the Indian government will return to a strong investment and growth push anytime soon.

Ambiguity in supply chain positioning: UBS said it is finding it hard to conclude if India will emerge as a clear winner in the ongoing global supply chain realignment.

Valuation concerns: Indian equities are still trading at a premium, well above the historical averages, limiting the scope for upside.

Indonesia Upgraded

Indonesia has emerged as a standout winner for UBS in this shifting landscape. With valuations now back to pandemic lows and a market setup skewed towards domestic and defensive themes, the country offers a relatively safer harbor, UBS said. Political continuity following recent elections and optimism around the incoming 'national team' has further added tailwinds to the Indonesian equity outlook.

In contrast, Hong Kong has been downgraded to Neutral due to its vulnerability to global trade flows and high exposure to US-linked financial volatility. UBS has also cautioned against relying on high dividend yields in Hong Kong as a proxy for defensives, stating that EPS volatility diminishes the appeal of such metrics.

South Africa too has been downgraded to Neutral. While the market staged a strong post-election rally last year, UBS flagged concerns around political stability and the market’s exposure to global trade dynamics.

Shift Towards ‘Defensive’ and ‘Domestic’

The core of UBS’ EM strategy now revolves around two themes: defensives and domestic plays. The firm has reworked its entire market selection framework to prioritise economies and sectors that:

·         Exhibit strong EPS resilience even under trade stress.

·         Are less exposed to exports and global GDP.

·         Show stability in dividends and valuations.

·         Could benefit from lower oil prices.

·         Reflect bullish bottom-up analyst sentiment.

Among sectors, staples, retail, banks, utilities, and IT services have been identified as relatively shielded from macro shocks and more aligned with this defensive playbook.

UBS’ view has been to break away from traditional index exposures and focus on pockets of earnings stability within EMs that can weather the storm of global trade turbulence and high US bond yields.

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