UBS believes that 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 Asian ex-Japan asset class preferences among stocks.
The Nifty 50 index rose 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 are supported by a falling equity risk premium as interest rates come down,” Premal said. Kamdar, Analyst at UBS Securities India.
Given this background, he believes that India’s high valuation is sustainable and expects the Nifty 50 index to reach 25,200 by March 2025, which implies an increase of 12%. The Nifty target is based on the March 2026 EPS estimates ₹1,226 and a 12-month forward target PE multiple of 20.6x.
Read also: Sensex, Nifty 50 at record high; is market overheating? What should investors do?
“After a strong rally in Indian stocks, some profit in the near term cannot be ruled out as economic and geopolitical risks remain elevated. However, India remains in a good place, in our view, and we recommend investors use any corrections as buying opportunities considering the long-term structural growth opportunities that exist,” added Kamdar.
He likes auto, 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 favored on the metals and telecom sectors.
Key risks for Indian markets, according to the UBS analyst, include unfavorable election results, a delay to the start of the exchange rate and geopolitical tensions in the Middle East (increase in oil prices).
Read also: Nifty Next 50 outperforms all major indices in February, Microcap 250 over 95% in 1 year; check details
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 fueled optimism among foreign investors as seen in the increase 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 changing its stance to neutral followed by a massive 50 basis point (bps) rate hike in the second half of the year. Although the RBI remains cautious, fiscal consolidation and bond index-inclusive inflows are likely to 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.
Read also: It’s time to give fixed income products their rightful place in your portfolio
“Given this backdrop, we prefer medium-to-long-term bonds. Historically, turning positive on the long-term bonds well ahead of the prime rate has reaped returns. Thus, we believe it is a good time to add long-term 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 tax cut cycle, supply shocks due to geopolitical tensions, higher food inflation due to adverse weather conditions and any negative developments to index inclusion.
Coin
UBS expects India’s current account deficit to narrow to 0.8% of GDP in FY24E due to an improving trade deficit. Going into FY25, it rises modestly to 1.3% of GDP due to slowing global growth and sustained domestic demand. Overall, the brokerage firm expects the current account deficit to remain well contained, thereby supporting the Indian rupee.
India’s 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 opinions and recommendations made above are those of individual analysts or trading 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, 15:14 IST