UBS upgrades rating on India to 'neutral', says 'still prefer China'

UBS said it still prefers China over India.

Switzerland-based brokerage UBS upgraded its rating on India, given a series of factors: high domestic focus, EPS resilience, beneficiary of lower oil prices, and positive catalysts like banks' deposit rate cuts and potential government support for consumption.

However, the brokerage noted that it still prefers China over India at the current juncture, given lacklustre stock fundamentals and uncertainty on government focus towards growth/investments. Further, UBS added that it is hard to conclude India as a major winner in supply chain shifts. On the valuation front, valuations are still significantly higher than historical averages.

"Hence, while India is upgraded to neutral, we prefer China for better defensiveness, lower valuations, and potential upside from stimulus/domestic flows," said Sunil Tirumalai, Executive Director, Head of EM and Asia Equity Strategy at UBS.

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Going ahead, in a 'no tariff' scenario, the UBS global strategy team sees better outlook for Emerging Market equities versus the S&P 500. The brokerage noted that over 35 percent of MSCI EM topline is from exports/external sales (of which 13 percent to US) which could be at risk.

Currently, global valuations are still in-line with 10 year historical averages ex-Covid. In particular, EM valuations are highly sensitive to US high yield corporate bond spreads (100 bps widening historically leads to ~1.4x drop in PE), added the report.

"We may be wrong if we are entering a new world where the rest of the world decouples from the
past relationship with US assets. Overall, we tactically move domestic and defensive in our market
positioning — we upgrade Indonesia to overweight and India to neutral," Tirumalai stated.

As a result, UBS also realigned its market selection framework to themes that suit the current scenario of trade uncertainties. The brokerage's preference is for markets that show attractive fundamentals while satisfying some or all of these characteristics:

• EPS resilience to GDP slowdown: EPS less affected by mix of changes in UBS GDP forecasts post US tariffs
• Domestic-focused: Low US/high domestic topline exposure at the index level
• Defensive: Most resilient EPS trends over 15 years
• Beneficiary of lower oil prices

UBS also downgraded South Africa and Hong Kong markets to 'neutral'. On South Africa, the brokerage said there was a good post-election run, but there are concerns on GNU government's stability and exposure to global trade slowdown. Hong Kong, on the other hand, is exposed to global/US trade flow risks; and high dividend yields are not necessarily a defensive indicator given its volatile EPS history.

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