India extremely expensive says UBS, even as it gives China a double upgrade

Global brokerage UBS has said the Indian market has turned unattractive due to extremely expensive valuations relative to the ASEAN countries. The brokerage has an ‘underweight’ stance on India along with Taiwan and Australia (just downgraded from neutral).

“In our framework, Taiwan, Australia and India look unattractive, especially on valuations/ earnings and ASEAN generally looks positive,” said UBS Strategist led by Niall MacLeod in their APAC Equity Strategy note on Wednesday.

ASEAN stands for Association of Southeast Asian Nations, while APAC is Asia Pacific.

UBS is currently overweight on Indonesia, Philippines, Singapore, Malaysia and China (upgraded from underweight to overweight).—markets that have underperformed India this year.

The benchmark Nifty has gained 30.3 per cent so far this year, even as the MSCI APAC (excluding Japan) has remained flat.

Due to the sharp outperformance, India’s valuation premium has expanded at record levels of 90 per cent versus the MSCI Emerging Market Index compared to 10-year average of 43 per cent.

“India, like Taiwan, looks very poor on our scorecard framework. The relative valuation of India to ASEAN, two areas with similar growth dynamics and occasional perceived macro vulnerabilities, looks too wide to justify. We note that both in India and Taiwan, retail investors have played an outside role, which while difficult to predict in terms of reversing, creates an additional potential headwind if this demand unwinds,” MacLeod has said.

The brokerage said the earnings momentum in India is seen fading, while the scope for an economic rebound this year was slim. Also, low real yield and overvalued currency make India vulnerable to US tapering.

UBS assessment would mean other Asian markets could attract a higher share of foreign flows going ahead, leading to relative underperformance in domestic equities.

Since August, the Indian markets have benefited due to the regulatory issues in China. However, that trade seems to be reversing now.

“We've been underweight Chinese equities since summer 2020. A recovered economy and expensive market faced tighter monetary policy while the rest of the region offered better cyclical recovery prospects and more attractive valuations. 16 months on we reverse this call,” UBS said. “Relative valuations have also reversed and should look better in 2022. Regulatory concerns are also overdone in our view