UBS upgrades India to ‘Neutral’, favours China for better risk-reward in emerging markets; here’ why

UBS has shifted its stance on India, upgrading it from “Underweight” to “Neutral” in its Emerging Markets (EM) strategy. Despite the upgrade, the bank remains cautious on India, citing better risk-reward opportunities in China. Here are the four key factors driving UBS’s preference for China in the current market environment.

1. Muted Earnings Outlook for India

UBS has highlighted that India’s earnings outlook has been subdued, with continued downgrades in earnings per share (EPS) forecasts. This soft performance has weighed on investor sentiment, making the Indian market less attractive compared to others, especially China, which shows stronger growth potential in the near term.

2. Uncertainty Surrounding Government Policy

Despite a relatively stable economic environment, there is uncertainty surrounding India’s government policy. UBS pointed out that it remains unclear whether the Indian government will ramp up investments or make significant policy changes to drive growth. The lack of clarity on the government’s economic agenda adds an element of risk for investors.

3. Ambiguity in Global Supply Chain Dynamics

UBS raised concerns about India’s role in the shifting global supply chains. While the country could potentially benefit, UBS noted that it’s still unclear whether India will solidify its position as a major player in the global supply chain. This ambiguity poses additional risks for investors.

4. Valuation Concerns in India

Indian equities are currently trading at a premium to historical averages, which has raised concerns about overvaluation. UBS believes that the high pricing limits the upside potential for Indian stocks. In comparison, China’s lower valuations provide better opportunities for growth at more reasonable prices.

Why China Remains UBS’s Preferred Market

UBS’s preference for China over India stems from several factors, including lower valuations, better risk management, and upside potential from domestic stimulus measures. The bank believes China offers a more defensive stance within the emerging markets, with a stronger outlook for growth in the coming months.

UBS’s updated strategy focuses on regions with strong earnings resilience, less dependency on global trade, and more favorable fiscal conditions. For now, China fits these criteria better than India, positioning it as the preferred market in UBS’s emerging markets playbook.

UBS’s decision to upgrade India to “Neutral” shows that the country still holds potential, but it is not without risks. With muted earnings, policy uncertainty, and high valuations, India faces challenges in the short term. Meanwhile, China’s better risk-reward balance makes it the favored option for investors seeking stability in the current global market landscape.