Earnings momentum, structural drivers stronger for other EMs: Tirumalai

UBS flags elevated valuations as global investors stay cautious on India, favouring other EMs amid stronger AI-driven growth opportunities

Global investors remain cautious about India, as elevated valuations and more compelling opportunities in other markets are driving a reassessment of allocations, says Sunil Tirumalai, head of emerging market (EM) and Asia equity strategy at UBS Securities. In an interview with Samie Modak, Tirumalai explains why India remains underweight in UBS’ EM portfolio, how domestic liquidity has reshaped market dynamics, and what could rekindle foreign investor interest. Edited excerpts:

 

What is your current positioning on EMs, and where does India stand? 

In the EM basket, we are overweight on China, South Korea, Brazil, and Malaysia, while India has been underweight for some time. We briefly turned neutral on India last year when valuations corrected. However, as the technology (tech) cycle — especially artificial intelligence (AI) — strengthened further, we increased exposure to markets like Taiwan and moved India back to underweight. Our current positioning reflects where earnings momentum and structural drivers are strongest.

 

India has traditionally traded at a premium to other EMs. How has that evolved? 

India has always traded at a premium, while China has typically traded at a discount (except for the 2020–2021 period when China was the only major economy open during the pandemic). That premium reflects investor perception — stronger institutions, governance, and long-term growth visibility.

 

Before Narendra Modi became Prime Minister, the premium was 15–20 per cent, adjusted for growth and the sectoral mix of the India index. It then moved up to 30–40 per cent and stayed there for a while before rising sharply after the pandemic. At one point in 2024, the premium reached nearly 100 per cent, meaning Indian stocks were valued at almost double those of comparable global peers. That has now been corrected to around 70 per cent, which is still elevated. In our view, a 40 per cent premium is more reasonable.

 

What drove the sharp spike in India’s valuation premium? 

The move from 40 per cent to 100 per cent was largely driven by valuation expansion rather than earnings growth. Price-to-earnings (P/E) multiples rose sharply without a commensurate improvement in earnings. A foremost part of this was driven by strong domestic liquidity and retail flows.

 

How has the role of domestic investors evolved in recent years? 

Domestic investors have become the primary drivers of market direction across many countries. India is a clear example. After the pandemic, the market has outperformed other EMs despite net foreign selling. In contrast, China has seen foreign inflows but underperformed. This shows that domestic flows are now playing a dominant role in shaping market outcomes.

 

How do you see this premium adjusting from this moment on? 

There are only two ways this can normalise — either earnings growth accelerates meaningfully or valuations correct further. At the moment, there isn’t strong visibility on a sharp earnings acceleration. Unless that changes, valuations may need to come down further.

 

Global investors are already highlighting this gap. For instance, when they compare high-quality staple companies in other EMs with Indian peers, growth is similar, but the valuation gap is large. That makes India harder to justify at current levels.

 

Aren’t foreign investors already heavily underweight India? 

Interestingly, no. That’s a common perception, but our data suggest otherwise. We analyse stock-level holdings of global funds managing over $1.5 trillion benchmarked to MSCI EMs. On that basis, India still appears to be in an overweight position. That overweight has reduced over time and moved closer to benchmark weights, but it hasn’t turned into an underweight yet — at least as of the latest available data for December 2025.

 

Does that make India more vulnerable to further foreign portfolio investor outflows? 

Yes. If a market is still overweight in global portfolios, there is room for further reduction. We are already seeing this dynamic. Even when EMs started receiving inflows before the Iran conflict, India received less than its fair share. Flows were directed more towards South Korea, Taiwan, Brazil, and China. So India is facing both outflows and a relative lack of participation in inflows.

 

What could make India attractive again for global investors? 

There are two key triggers. First, if the current AI-driven enthusiasm moderates. Markets like South Korea and Taiwan are benefiting from the AI supply-chain narrative. If that optimism cools or gets priced in, India could benefit on a relative basis.

 

Second, India’s approach to manufacturing, especially its engagement with China. Scaling up manufacturing meaningfully would likely require Chinese investment and tech, as seen in countries like Vietnam, Thailand, and Mexico. If India becomes more open to such collaboration, it could have broad macroeconomic benefits in terms of jobs, exports, and the current account.

 

You use a different approach to valuation analysis. What does that show? 

Most market participants quote conventional valuation multiples. For example, a 20–21x P/E for India, which can be distorted due to the underlying arithmetic. These are often not properly weighted and can be overly influenced by stocks that do not materially affect the index.

 

At UBS, we calculate P/E using weighted averages across all stocks. On that basis, MSCI India’s P/E is closer to 27x. We apply the same methodology across countries for P/E, earnings growth, and return on equity (RoE) to ensure comparability. This also changes the perception of markets like China. On a simple aggregation, China appears weak, but on a weighted basis, it shows strong RoE due to large tech companies like Alibaba and Tencent.

 

Could MSCI’s reclassification of South Korea benefit India? 

If South Korea moves to developed-market status, India could see incremental inflows as index weights are redistributed. South Korea, meanwhile, could face temporary outflows during the transition. However, we see a low probability of this happening in the near term.