Underweight on India relative to other EMs, earnings revival key: UBS

Chhaochharia explained that India remains underweight because of near-term earnings and stronger growth in other EM countries

Indian companies may see an earnings revival post-Goods and Services Tax (GST) revamp, but sustained growth hinges on corporate capex and consumer incomes, says Gautam Chhaochharia, head of global markets, India at UBS.

 

The impact of the “big” tax cut will be seen in the third quarter, and the earnings downgrade cycle is seeing an inflecion in the new term, Chhaochharia said in a conversation with Business Standard.

 

However, he cautioned that the GST push will not be enough. “It’s a big stimulus, but it has to be followed through with pickup in corporate capital expenditure, pickup in consumer incomes and pickup in credit growth in the system.”

 

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Only when this happens will a sustained recovery be seen in the long run, Chhaochharia said. “So, the big hope from the policymakers also is that this is the beginning and it drives the response of both corporates and households.

 

Union Finance Minister Nirmala Sitharaman earlier said the GST reforms have released about ₹2 trillion into the economy, putting more cash in the hands of citizens and potentially boosting corporate profitability if spending rises.

 

UBS sees consumption as the key thematic, with selective opportunities in industrials, defence, and financials.

Underweight on India

Chhaochharia said that, in a relative context, UBS remains underweight on India within the emerging market basket. He explained that India remains underweight because of near-term stronger growth in other countries.

 

According to him, China is a "major" overweight for UBS's emerging market strategy. He added that foreign investors are currently more engaged in China, but also in other markets, particularly around the technology theme in Taiwan and Korea.

 

The benchmark Nifty and Sensex hit record highs over a year ago and are down nearly 6 per cent from their peak levels. The MSCI India gauge has trailed the broader gauge of Asian equities by over 19 percentage points, according to Bloomberg. 

D-St to be range-bound in near term

UBS’s Chhaochharia said markets are likely to remain range-bound in the very near term, as domestic inflows continue to provide support and prevent sharp corrections.

 

Markets are likely to remain range-bound in the very near term, as domestic inflows continue to provide support and prevent sharp corrections. Pipeline of capital raising caps the liquidity driven upward push to markets. 

 

A material move in either direction will depend on fundamentals, specifically, a meaningful pickup in earnings growth, he said. Conversely, if geopolitics, tariffs, or a global slowdown weigh further on India's growth, as they did last year, markets could break out of the range on the downside.

 

On valuations, he said that domestic stocks are on the higher side against their historical levels. However, they have cooled off compared to the last two to three years.

 

For the upcoming Samvat, there is "hope and optimism," Chhaochharia said. But the near-term outlook hinges on two key factors: the outcome of the US trade deal and the trajectory of global growth, he said.

 

If the trade deal proves favourable for India and global growth stabilises, markets could be in a strong position over the next year, he said. However, he cautioned that the trade deal outcome remains uncertain at this stage.