UBS Says India’s Stock Valuations are Expensive; Double Upgrades China

International brokerage firm UBS has stated on Wednesday that India’s market has become unattractive as equity valuations have turned quite expensive. India’s stock valuations are expensive right now as compared to other ASEAN nations.

Notably, UBS has an ‘underweight’ stance for India while it has double upgraded China’s ratings to ‘overweight’.

Let’s take a closer look to find out more on this issue.

UBS Stance on Different Nations

The APAC Equity Strategy note from UBS released on Wednesday shows that in the UBS framework, Taiwan, India and Australia appear to be expensive on the valuation and earnings front. However, the ASEAN nations seem to look positive. ASEAN is a group of 10 Southeast Asian countries.

UBS has provided an ‘overweight’ stance on countries such as China, Indonesia, Malaysia, the Philippines, and Singapore. These markets have underperformed India in 2021. China has been double upgraded to overweight from underweight.

In the case of China, the overweight rating is partly due to the brokerage firm’s forward-looking approach towards the market, particularly in view of China’s domestic regulatory policies. China scores less on two major parameters – PE valuation and earnings momentum. UBS, however, believes this might be misleading as the rollover impact of earnings growth will help in pushing up China’s ranking.

Chinese equity has been underweight since the summer of 2020. It saw stringent economic policy in an expensive market while the rest of the neighbouring areas enjoyed better economic prospects and impressive valuations. UBS says that 16 months down the line, it has reversed the ratings.

A Close Look at India’s Rating

According to UBS, India, similar to Taiwan, seems to be quite poor on its scorecard framework. India and the ASEAN region have two major similarities in terms of the growth dynamic and vulnerabilities in the macroeconomic space. Yet, the valuation of India as relative to ASEAN nations is significantly wide.

UBS strategist MacLeod stated that both in Taiwan and India, the retail investors had played an outside role. In the case of India, the earnings momentum seems to be slowly fading away, while the scope of an economic revival seems to be quite narrow. This statement comes at a time when Indian stocks have comfortably outperformed markets such as Indonesia by as much as 31% year-to-date. Moreover, an overvalued currency and low real yield have made India all the more vulnerable.

UBS thinks the most important question for India is how soon India’s mobility issues are going to be resolved. In addition, UBS wonders how long the retail flow in the country would persist.

Propelled by stark outperformance, India’s valuation has shot up 90% as compared to MSCI Emerging Market Index.

Bottom Line

This UBS assessment would translate to a higher foreign flow of funds in those Asian markets with positive ratings. It might lead to underperformance in domestic equities.

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Frequently Asked Questions

1. How has been Australia rated in the UBS assessment?

Australia has been recently downgraded to ‘underweight’ from neutral.

2. How much did Nifty gain as compared to MSCI APAC?

India’s Nifty gained 30.3% so far in 2021 as MSCI APAC (apart from Japan) remained largely flat.

3. What has been the percentage of expansion of valuation for the MSCI Emerging Market Index in the last 10 years?

MSCI Emerging Market Index saw an average valuation expansion of 43% in 10 years.