Market rally hinges on earnings revival, valuation comfort: Chhaochharia

Indian equities may stay range-bound unless earnings revive or valuations turn more attractive, says UBS, noting moderation in FPI selling but limited near-term upside

Indian equity valuations have corrected but remain insufficiently attractive for global investors, with earnings growth continuing to be the weak link, says Gautam Chhaochharia, head of global markets, India, at UBS. In an interview with Sundar Sethuraman and Samie Modak, Chhaochharia says the recent US trade deal has removed a key near-term overhang, though any meaningful upside to the economy will take time to materialise. Edited excerpts: 

India has underperformed global markets over the past year and even this year so far. Why has India lagged despite a supportive global backdrop like debasement trends? 

At the core, India is stuck in a triangle of valuations, earnings, and liquidity. Valuations remain expensive relative to peers, earnings growth has been weaker than expected, and while domestic liquidity is strong, capital raising has been even stronger — absorbing much of that liquidity. A year ago, valuations were even richer; they’ve corrected somewhat but are still not attractive enough for global investors. Earnings growth is the weak link. Some pickup is expected, but it’s not yet at a level that long-term investors expect from India or relative to the region. 

How does India compare with other emerging markets (EMs) on earnings and valuation? 

Two years ago, global and regional earnings were weak, but now several markets — including China — are offering stronger earnings growth, aided also by technology exposure. Valuations there are also more reasonable. Historically, India’s earnings growth stood out versus peers, but this time the relative picture is different. That’s one of the unique features of the current cycle. 

Does that mean India is stuck in a range-bound market?

 

Yes, for the near term. However, a few things can still improve the setup. One, the pace of foreign selling could slow. We don’t expect foreign investors to return aggressively, but the intensity of selling may ease. Two, when EMs as an asset class see inflows, India still gets some allocation — even if investors are underweight. Put together, foreign selling could moderate. A sustained rally, however, would require either stronger earnings or more attractive valuations. 

Foreign investors sold around $3–3.5 billion last month, even as the dollar weakened and other EMs did well. Why is India being singled out?

 

This cycle has two very distinct features. First is technology. Most global opportunities today — artificial intelligence (AI), semiconductors and hardware — are outside India. 

India doesn’t really participate in that theme. Second is relative earnings. If you look at the history, India usually offers superior earnings growth. This time, that’s not the case and multiple markets offer growth. That combination makes this episode different from previous cycles and suggests the trend won’t reverse quickly till earnings growth recovers.

 

How do recent trade developments with the US and Europe change the outlook? 

The US deal removes an overhang for market sentiment in near-term. The upside to the economy should happen but may take some time to flow through. 

Europe is interesting, too, even if it’s less headline grabbing. The key point is that concerns around access to US capital and high-end technology have eased. That makes large global investors and technology players more comfortable, even though, in practice, investment never really stopped.

 

Are there valuation opportunities emerging within the market?

 

At a stock level, yes — more than at a sector level. There are pockets where valuations are far more reasonable than before. But the risk-reward is still not compelling enough for a broad market, aggressive bottom-up buying phase. Earnings growth remains the key variable. We’ve seen in recent years that when growth comes through, valuations can overshoot. Without that earnings trigger, it’s difficult to argue for a valuation-led rally.

 

What could trigger a stronger earnings upcycle?

 

Most macro pieces are actually in place — macro stability, policy support, a healthy banking system, and lower interest rates versus history and gaps with other countries also lower versus history. 

But something has been missing — perhaps animal spirits or a strong demand catalyst. You can rarely pinpoint one trigger in economic cycles. What we’re watching closely is credit appetite, not just credit growth. Banks were conservative over the past year or two, but lending standards may gradually ease. Credit growth could surprise positively versus Street and analyst expectations, and that could flow through to earnings faster than expected — possibly within 6 to 12 months. Worth keeping an eye out on, though not our base case view from Research. 

What’s your view on commodities and precious metals?

 

Narratives around geopolitics, de-dollarisation, and debasement are popular, but hard to quantify over multiple years.

The moves can be violent because these markets aren’t as deep as equities or currencies, and derivatives amplify volatility. That environment can persist, but it’s not something we’d anchor a long-term view on without caution. We remain positive on the gold outlook though.

 

Which sectors look attractive from a risk-reward perspective? 

Financials remain attractive areas top down. Within financials, most sub-segments look reasonable, including large private banks. However, this is still not a market for big sector bets over a 6–12 month horizon. It’s a bottom-up, stock-specific market, including for financials. 

In autos, for example, we like commercial vehicles, electric vehicle (EV)-linked themes, and especially premiumisation, which we think is a powerful structural trend.

 

Are elevated US yields a headwind for India? 

If they were a major headwind, we would have seen it over the past year. So far, they haven’t derailed global equities. These risks are present, and when they materialise, the impact can be sharp—but timing them is extremely difficult. 

Finally, how do you see the rupee? 

Many headwinds—FPI sentiment, trade issues, dollar strength—tend to move together. With some of these easing, the broader environment looks more supportive near-term though longer term trajectory of gradual depreciation hasn’t changed.