'India ticks a lot of boxes but': UBS upgrades domestic stock market, but still prefers China; here's why

Foreign brokerage UBS has upgraded its stance on Indian equities to ‘Neutral’ but continues to favour China within the emerging markets (EM) universe, citing a more favourable risk-reward profile. The global strategy team at UBS highlighted that EMs could benefit from capital outflows from the United States, though this is contingent on a scenario free of new tariffs.

UBS acknowledged India's strengths, noting its strong domestic orientation, resilience in earnings per share (EPS) even during adverse conditions, and potential advantages from declining oil prices. Additional tailwinds include banks' growing willingness to lower deposit rates—despite sluggish deposit growth—and possible government measures to boost consumption.

Despite these positives, UBS remains cautious. It pointed to lacklustre stock fundamentals and uncertainty around whether the government will pivot back toward growth and investment. Furthermore, the brokerage is not convinced India is a clear beneficiary of global supply chain realignments.

Valuation concerns persist as well. UBS noted that Indian equity valuations remain significantly elevated compared to historical norms. The firm is also closely monitoring trade negotiations, particularly in sensitive sectors such as agriculture and retail.

UBS reiterated its preference for China, citing more attractive valuations, stronger defensive characteristics, and the potential for gains driven by domestic stimulus and capital flows. "We see better risk-reward in China within EM: better defensiveness, lower valuations, and potential upside from stimulus/domestic flows," it said.

According to UBS, over 35 per cent of the MSCI EM revenue base is derived from exports, with 13 per cent tied to the United States — a segment now seen as vulnerable. While consensus estimates project a 15 per cent compound annual EPS growth rate (CAGR) for EMs over the next two years, this compares to just 11 per cent growth over the past three years.

Valuations across EMs are currently in line with their 10-year historical averages, excluding the COVID-19 period. However, UBS warned that EM valuations remain sensitive to United States high-yield corporate bond spreads. Historically, a 100 basis point widening in spreads has resulted in a 1.4 times contraction in price-to-earnings multiples.

In response to growing global trade uncertainties, UBS has recalibrated its market selection framework to emphasise resilient, domestically oriented economies. It has upgraded Indonesia to ‘Overweight’ alongside India’s shift to ‘Neutral’.

UBS now favours markets that demonstrate sound fundamentals and align with several key themes, including resilience in EPS amid GDP slowdowns, domestic consumption focus, defensiveness, and benefits from lower oil prices. The firm also places weight on positive bottom-up analyst views.

"Rather than relying solely on broad indices, we recommend focusing on sectors that have historically demonstrated stability in earnings during downturns—such as consumer staples, IT services, retail, banks, and utilities," UBS concluded.