Global investors bullish on Indian markets in spite of commanding 86% premium over emerging markets, says UBS Securities

Swiss brokerage UBS Securities said global investors are bullish on Indian equities market in spite of the 86 per cent premium it commands over emerging market peers and on the back of a 17 per cent outperformance so far this year. 

"India is one of only three markets to trade at a premium to its own history, (the other two being Thailand and the UAE)" despite it commanding an 86 per cent premium over its emerging markets peers, according to UBS Securities. 

In spite of the expensive valuations, most equity investors are quite optimistic, both from a cyclical and a structural perspective even though they see the economy losing the steam and printing in a 6.9 per cent growth this fiscal and a much lower 5.5 per cent next fiscal before settling at the long-run average of 6 per cent in FY25, UBS Securities said in a note on Tuesday. 

On Monday, its Wall Street rival Morgan Stanley said the Sensex would continue to outperform in 2023 with an average 10 per cent rally taking the benchmark index to 68,500 points by December 2023 on a base case scenario and in a bull-run, crossing the 80,000 mark, marking the third successive years of bull-run. 

"After the 17 per cent outperformance over the emerging market (EM) peers so far this year, India is at around 86 per cent premium to the EMs on a 12 month forward PE (price to earnings ratio). With most EMs available at a discount to history, India is one of only three markets to trade at a premium to its own history," writes Tanvee Gupta Jain, economist at UBS Securities India, in her note quoting global investors they met. 

However, for the brokerage its house is caution on India as it has been highly oversold now after three years of rally and expects the market to lose steam. But it has not offered a target for the Sensex/Nifty either in absolute terms or in percentage. 

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In contrast, debt investors are disappointed in the government delaying potential bond index inclusion, she said, adding that the inputs are from over 50 foreign institutional investors in Asia, the US and London. The foreign investors have net sold USD 18.5 billion of equities so far in 2022. 

According to Gupta Jain, the optimism is driven by the perception of a relatively better outlook for the economy/politics/geopolitical position of the country, but more importantly the reality of strong domestic flows. 

But she expects the domestic household flows into the market to soften with the reopening of the economy and wider avenues for consumption. Also, household asset allocation decisions towards equities have a high dependence on bank deposit rates. As bank rates rise, she expects household flows to slow. 

On the marco front, she says the current account deficit will widen to 3.7 per cent this fiscal on the back of falling exports and the weakening balance of payments position. 

On the nagging inflation front, which has been consistently above the RBI's upper threshold limit of 6 per cent since February, the brokerage expects it has likely peaked now. 

She expects average inflation to moderate to 5.2 per cent in FY24, from an estimated 6.7 per cent in FY23, amid improvements in global supply chains, slowing domestic demand, and stable or falling global commodity prices. That said, she thinks inflation will remain sticky and stay above the RBI's medium-term target of 4 per cent in FY24 due to uncertainty regarding regulation. 

Despite this, the agency expects the Reserve Bank to choose the middle path in its monetary policy moves, allowing for orderly and gradual depreciation of the rupee, which will trade in the 82-85 per US dollar range in the rest of FY23, while keeping its policy stance in sync with global monetary tightening. She sees the repo rate peaking at 6.25-6.50 per cent in this cycle. 

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But Gupta Jain did not offer her views on the December 7 policy review wherein the majority expect the monetary authority to deliver another 25-35 basis points hike, taking the policy rates to pre-pandemic level of 6.25 per cent from the present 5.90 per cent. 

However, investors are worried whether the risk of the government turning populist exists as the Modi government's last full budget approaches ahead of the May 2024 general elections. 

Pricing in some sort of a populist budget, she expects the government to go slow on fiscal consolidation and target the fiscal deficit at 5.9 per cent in FY24 (from 6.4 per cent in FY23) as she sees the public capex push continuing towards boosting rural/welfare spending.