UBS upgrades resilient India amid global trade war

UBS acknowledged India's strengths, noting its strong domestic-focused toplines, resilience in earnings per share (EPS) even during adverse conditions, and potential advantages from declining oil prices.

Additional tailwinds for the Indian economy include the growing willingness of banks to lower deposit rates, despite sluggish deposit growth, and possible government measures to boost consumption.

Global brokerage is becoming more optimistic about the Indian market amid a growing preference for defensive and domestically-oriented shares, UBS strategists, including Sunil Tirumalai, wrote in a note released on Thursday.

"While valuations still look expensive relative to ordinary fundamental performance of companies, India screens as defensive amidst trade uncertainty given its domestically focused economy, while benefiting from lower crude oil prices," the analysts pointed out.

The upgrade comes in the wake of global investors looking at Indian assets as a relatively safe haven, with local stock benchmarks quickly recovering losses after the initial shock that followed the announcement of the US tariff hikes.

However, UBS remains cautious due to what it considers as lacklustre stock fundamentals. The brokerage is also not convinced India is a clear beneficiary of global supply chain realignments that will take place amid the trade war that has broken out.

Valuation concerns persist as well. UBS noted that Indian equity valuations remain significantly elevated compared to historical norms. The brokerage is closely monitoring trade negotiations, particularly in sensitive sectors such as agriculture and retail.

Meanwhile, UBS downgraded Hong Kong stocks to neutral from overweight as the tariff risk could dampen sentiment, given the market's relatively high trade dependence and index exposure to US revenues.

The brokerage also upgraded Indonesia to overweight from neutral, given its domestic and defensive qualities, "with valuations now close to Covid lows" and potential support from state-owned funds.

UBS has held an underweight rating on India since 2022. In April last year, they upgraded Chinese stocks to overweight, citing a promising earnings outlook and potentially higher participation by domestic investors.