UBS Labels India as the 'Least Appealing' Market, Cautions Against Election Risks and Oil Price Surge

18 Nov, 2023

UBS Labels India as the 'Least Appealing' Market, Cautions Against Election Risks and Oil Price Surge

As the 2024 horizon approaches, some analysts have begun revising their market return projections for the upcoming year. Amidst prevailing market conditions and potential risks, UBS, in a recent note, has identified India as the "least attractive" market among major global counterparts, aligning it with Saudi Arabia, Singapore, and Thailand, where it holds an underweight position. The brokerage firm's position stems from concerns over "expensive valuations" and the "ordinary fundamental performance of companies."

Sunil Tirumalai, a Strategist at UBS Securities India, highlighted potential risks being disregarded by the market, such as the impact on rural demand from El Nino. He also emphasized the market's reliance on the assumption of continuity in the upcoming elections. Additionally, he expressed a viewpoint that the perceived 'safety premium on India' might reverse due to unfolding tech cycles and a potential recovery in China, potentially softening retail flows as bank deposits continue to remain high.

UBS's contrarian stance arrives against the backdrop of comparatively modest market returns, particularly from large-cap stocks. Both the Nifty and Sensex have recorded approximately 8 percent increases, falling below the long-term average return of 11 percent. This trend follows a similar subdued performance in 2022.

While the current valuation of the Nifty appears lower than its 10-year average, it remains relatively high compared to global peers. However, some argue that India has historically maintained an expensive market position, suggesting this might not pose a significant risk.

Analysts caution investors regarding two primary risks: the Indian elections, where a change in government could disrupt equities, and the trajectory of crude oil prices. Elevated oil prices could sustain high inflation and constrain company margins.

Ridham Desai, Equity Strategist at Morgan Stanley India Company, acknowledges India's strong fundamentals but warns about potential market volatility due to an event-heavy calendar with uncertain outcomes.

Morgan Stanley's base case projects a 14 percent increase in the BSE Sensex by December 2024, assuming a stable government, calibrated RBI policies, robust domestic growth, a healthy US economy, and favorable oil prices. Their bullish and bearish scenarios predict Sensex targets at 86,000 and 51,000, respectively.

Despite concerns, retail investor support through mutual fund investments continues, likely providing a cushion to equities in the face of adverse events.

Analysts favor domestic cyclicals given the strength of domestic growth and low inflation. Financial, consumer, and industrial cyclicals are expected to outperform, barring unfavorable election outcomes. Defensive sectors like consumer staples, utilities, healthcare, and telecoms might lag in 2024 unless election results prove favorable for markets.

Barclays echoes similar sentiments, recommending domestic cyclicals such as infrastructure, capital goods, financials, and consumer discretionary sectors due to their potential for earnings growth. Meanwhile, global cyclicals like metals and technology sectors might face more challenges ahead.