India-US trade deal: Why UBS is still underweight on Indian stock market

Domestic market cheered India-US trade deal on Tuesday and UBS believes it would bring a near-term relief to equities and rupee. That said, the foreign brokerage remained cautious on Indian stocks, retaining its 'underweight' stance on the market, citing three key reasons. UBS said the trade deal and policy support may buoy India's growth towards 6.9 per cent in FY27. It also sees India well-positioned to gain from global supply chain shifts.

But beyond that, it still is cautious. UBS noted that India's forward earnings growth is lower than the rest of emerging market (EM) pack even over a 2-year forward basis, adding that its return on equity (ROE) and return on invested capital (ROIC) have undershot other EMs. 

On the other hand, it felt India's valuations remain expensive. India has derated considerably over the last 18 months, but still trades at a 47 per cent premium - higher than historical levels, the foreign brokerage said.

Lastly, it said there is a lack of any credible AI stocks in the India index today. 

"We stay defensive rupee (2026e: 94). Rupee’s past year's depreciation already overshot the tariff-shock adjustment by 3 per cent, yet three forces continue to weigh on India’s capital account- weak growth, unattractive equity valuations, and the AI-gap - pushing rolling 12m capital flows to multi-year lows," UBS said. 

In the absence of RBI smoothing, rupee would have been far weaker, it said.

"Even with a 12 per cent YoY REER drop, the multi-year low core goods balance doesn’t suggest rupee is cheap, UBS said. 

The foreign brokerage said MSCI India exposure to goods exports to US is low at 0.6 per cent against EM's 15 per cent, with the bulk of exports accounted for by services which were outside tariff purview. 

The sectors that export to the US have limited presence in the listed index, it noted.

"However, the high tariffs were clearly an overhang on foreign sentiment - coming up frequently in our investor discussions (with worries of India getting isolated in global trade). Thus - the deal announcement should give some near term relief," the brokerage said. 

Also, the 18 per cent tariff places India only in line with the MSCI EM weighted average tariff of about 18.5 per cent.

Textiles, jewellery, engineering goods, leather and chemicals are seen gaining from the trade deal. 

Overall, UBS noted that the US accounted for $92 billion, or 20 per cent of India's goods exports, or about 2.2 per cent of India's GDP as of CY2025.

"We do note that despite higher US tariffs on India coming into effect from August 2025, India’s goods exports have held up largely on export diversification. While India‘s exports to the US fell 1 per cent YoY during Sept-Dec, largely in categories such as gems & jewellery and marine products, it gained market share in other markets including China, UAE, Vietnam and Thailand. Resilience in India's exports was largely attributed to a sharp increase in electronic goods exports which were up 28 per centYoY during Sept-Dec 2025. India's robust services exports also provided a buffer against global trade disruptions," it said.