UBS Upgrades India Rating to ‘Neutral’, Still Prefers China

UBS Raises India’s Rating Amid Domestic Resilience and Lower Oil Prices

Switzerland-based international brokerage UBS has upgraded its rating on India to ‘neutral,’ citing a number of factors contributing to the country’s positive outlook. Key reasons for the upgrade include India’s high domestic focus, resilience in earnings per share (EPS), and the country’s status as a beneficiary of lower oil prices. UBS also highlighted catalysts like the reduction in bank deposit rates and potential government support for consumption as positive signs for India’s economic trajectory.

• India’s upgrade to ‘neutral’ driven by strong domestic fundamentals and lower oil prices.

• EPS resilience and government initiatives are seen as positive developments for the country.

• Potential benefits from lower oil prices add to the positive outlook for India.

UBS Prefers China Over India Despite Upgraded Rating

Despite upgrading India’s rating, UBS maintains a preference for China in the current global economic environment. The brokerage raised concerns about India’s stock fundamentals and uncertainty regarding the government’s focus on growth and investments. UBS pointed out that India’s valuation remains significantly higher than historical averages, making it less attractive compared to China, which is favored for its defensive nature, lower valuations, and potential upside from stimulus and domestic flows.

• UBS still favors China over India for its defensive positioning and stimulus potential.

• India’s stock fundamentals and high valuations are seen as concerns.

• UBS finds China’s market conditions more appealing at the current juncture.

Trade Uncertainties Lead to Strategic Shift in Market Positioning

UBS has revised its market positioning to better align with current trade uncertainties. The brokerage believes that in a scenario with no tariffs, Emerging Market (EM) equities may see a better outlook compared to the S&P 500. However, it cautioned that export-heavy EM markets, particularly those with high exposure to the US, could be at risk. As part of its strategy, UBS upgraded Indonesia to ‘overweight’ and shifted India to ‘neutral’, reflecting its focus on markets with resilient earnings and strong domestic fundamentals.

• UBS strategically shifts to markets with defensive and domestic-focused sectors.

• The brokerage upgraded Indonesia due to strong fundamentals and domestic exposure.

• Trade uncertainties lead UBS to favor domestic resilience over global exports.

The Impact of Trade and Global Risks on Emerging Markets

UBS’s global strategy team highlighted that more than 35% of the MSCI EM topline is derived from exports, with 13% of that from US sales, which could be at risk in the event of global trade disruptions. The brokerage also noted that global valuations are in-line with 10-year historical averages, excluding the impact of COVID-19. In particular, EM valuations are highly sensitive to US high-yield corporate bond spreads, with any significant widening leading to a potential 1.4x drop in PE ratios.

• EM equities are at risk from global trade disruptions and sensitive to US bond spreads.

• UBS warns of potential valuation drops in Emerging Markets if US bond spreads widen.

UBS Market Strategy: Focus on Defensive Sectors Amid Trade Risks

UBS emphasized the importance of focusing on sectors that have historically weathered economic storms with limited earnings declines, particularly during uncertain trade periods. Recommended sectors include consumer staples, IT services, retail, banks, and utilities. UBS’s market realignment underscores its preference for resilient earnings and domestic exposure rather than reliance on global trade flows.

• UBS recommends focusing on defensive sectors like staples, IT services, and utilities.

• The brokerage urges breaking market indices down into sectoral focuses for better risk management.

Downgrades for South Africa and Hong Kong Amid Global Trade Concerns

In addition to its adjustments in India and Indonesia, UBS downgraded South Africa and Hong Kong to ‘neutral,’ citing concerns over South Africa’s political stability and exposure to global trade risks. For Hong Kong, UBS noted the market’s high exposure to US trade flows and volatile earnings, with high dividend yields not necessarily offering a defensive cushion.

• South Africa’s downgrade due to concerns over political stability and global trade exposure.

• Hong Kong’s market faces risks from global trade dynamics and volatile earnings.