India stocks raised to 'overweight' by UBS Wealth

Expectation of a rate cut and a rebound in economic activity could push the Sensex higher.

Indian stocks have been raised to “overweight” by UBS Wealth Management as domestic demand improves and easing inflation paves the way for more rate cuts. Valuations of Indian stocks have fallen to “attractive levels” and the nation offers a higher return on equity compared with other Asian markets, said Pu Yong Hao, who helps oversee $931 billion in assets as chief Asian investment strategist at UBS AG's international and Swiss wealth management unit.

The Bombay Stock Exchange's Sensitive Index, or Sensex, rose to 10,803 on its highest since October 16 and a 34 percent increase from this year's low in March. The measure is now valued at 11 times reported earnings, compared with a multiple of 18 times for the MSCI Asia-Pacific Index and the market's five-year average of 18 times.

“As soon as inflation comes down, we see the central bank in the position to cut the interest rate to provide more liquidity to corporates and consumers,” Pu said in an interview from Hong Kong. He advised investors to buy so-called defensive industries such as consumer discretionary, telecommunications and health care, without naming any companies.

India's inflation in the week to March 21 held near the lowest level in two decades as commodity prices cooled and demand slowed, increasing the chance of an interest-rate cut by the central bank this month. Reserve Bank of India Governor Duvvuri Subbarao has slashed the key repurchase rate five times since early October to an all-time low of 5 percent to boost slowing economic growth.

Political concern
The Sensex could rise to 13,500 by March 2010 in anticipation of a recovery in earnings, analysts at UBS AG's brokerage unit predicted on March 27. That's 26 percent higher than Thursday's close.

Corporate governance and the upcoming political elections remain a concern, Pu added. Shares plunged in January after Satyam Computer Services former chairman said he falsified accounts in the nation's biggest corporate fraud investigation. Still, Indian companies are better managed than their Chinese peers, and the potential for economic growth makes the market an attractive investment in the long term, Pu said

The author is a Bloomberg News columnist. The opinions expressed are her own