UBS believes India offers the best structural growth story among other large economies and combined with political stability and supportive government policies, India remains in a favorable position and is most preferred in its Asia ex-Japan asset class preferences among equities.
The Nifty 50 index has risen 3.5% year-to-date (YTD) and hit a new all-time high on March 7 on the back of strong macro, healthy corporate earnings, and steady domestic institutional investor (DII) buying.
The index currently trades at a 12-month forward P/E of 20.5x, one standard deviation above its 10-year average.
“The most common pushback on India is its premium valuation. We believe the premium valuation is justified by cyclical and structural tailwinds, and further supported by political stability. Additionally, valuations get support from falling equity risk premium as interest rates fall,” said Premal Kamdar, Analyst at UBS Securities India.
Given this backdrop, he believes India’s high valuation is sustainable and expects the Nifty 50 index to reach 25,200 by March 2025, implying an upside of 12%. The Nifty target is based on March 2026 EPS estimates of ₹1,226 and a 12-month forward target PE multiple of 20.6x.
Also Read: Sensex, Nifty 50 at record high; is market overheated? What should investors do?
“After a strong run-up of Indian equities, some profit-taking in the near term cannot be ruled out as economic and geopolitical risks remain elevated. Nevertheless, India remains in a sweet spot, in our view, and we recommend investors to use any corrections as buying opportunities given the long-term structural growth opportunities that exist,” Kamdar added.
He likes autos, industrials, utilities, real estate, consumer durables and healthcare sectors that have high domestic exposure. The brokerage is neutral on Financials, FMCG, IT, Oil & Gas, and Chemicals, while it is least preferred on the metals and telecom sectors.
Key risks for Indian markets, according to the UBS analyst, include unfavorable election outcomes, a delay to the start of the rate cut cycle, and geopolitical tensions in the Middle East (surge in oil prices).
Fixed Income Outlook
The inclusion of India’s government bonds in the JP Morgan Global Bond Index in June 2024 and in the Bloomberg Index in January 2025 has fueled optimism among foreign investors as seen in the surge in FPI flows ($4.8 billion YTD) into Indian debt markets.
On the policy front, Kamdar believes that the Reserve Bank of India (RBI) could act in the June quarter by shifting its stance to neutral followed by a cumulative 50 basis points (bps) rate cut in the second half of the year. Although the RBI remains cautious, fiscal consolidation and bond-index-inclusion-related inflows will likely see bond yields fall over the coming months.
He expects the 10-year Indian government bond yield to decline to 6.25% by March 2025.
Also Read: It’s time to give fixed-income products their due place in your portfolio
“Given this backdrop, we prefer medium- to long-duration bonds. Historically, turning positive on the long-duration bonds well ahead of the first-rate cut has reaped returns. Thus, we believe it is a good time to add long-duration Indian government bonds and AAA corporate bonds,” Kamdar said.
Key risks for the Indian bond market include a delay to the start of the US rate cut cycle, supply shocks due to geopolitical tensions, higher food inflation due to adverse weather conditions, and any negative developments toward index inclusion.
Currency
UBS expects India’s current account deficit to narrow to 0.8% of GDP in FY24E on the back of an improving trade deficit. Heading into FY25, it modestly increases to 1.3% of GDP on slowing global growth and supported domestic demand. Overall, the brokerage firm expects the current account deficit to remain well contained, thereby supporting the Indian rupee.
India GDP
The brokerage firm expects India’s GDP growth to moderate due to global (weaker growth) and local factors (softness in public capex). From 7.6% year-on-year (YoY) growth estimated in FY24, it expects real GDP growth to moderate to 7.0% and 6.8% in FY25 and FY26, respectively.
Sector-wise, it expects some moderation in investment-led growth due to lower public capex while seeing a gradual recovery in consumption growth driven by a recovery in rural growth on expectations of a normal monsoon.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
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Published: 08 Mar 2024, 03:14 PM IST