UBS tags India as ‘least attractive’ market, warns of poll risks, crude surge

However, there are a couple of risks that investors should be wary of, say analysts: Indian elections, where any change in government can upend equities, and crude oil prices, which if remains elevated will keep inflation high and margins of companies lower.

As 2024 approaches, some analysts have started trimming down their expectations over market returns for the upcoming year against the backdrop of the current market scenario and potential risks.

UBS in its recent note said India is “least attractive” compared to other major world markets, putting it in league with Saudi Arabia, Singapore and Thailand, where it is underweight. The brokerage house cited “expensive valuations” and “ordinary fundamental performance of companies” for its stance.

“The market may be ignoring risks on rural demand from El Nino, in our view. The market's base case appears to be regime continuity in next year's elections. With the tech upcycle unfolding and potential China recovery, the 'safety premium on India' could reverse. Retail flows could soften as bank deposits remain elevated,” said Sunil Tirumalai, Strategist at UBS Securities India.

Lacklustre performance

The contrarian call by UBS comes in the backdrop of relatively lower market returns (so far), especially from largecaps. Nifty and Sensex have risen about 8 percent each, which is lower compared to the long-term average return of 11 percent. This follows similar muted returns in 2022.

Even as Nifty’s current valuation is lower than its 10-year average of 23 times, compared to global peers, it remains one of the most expensive ones. However, others argue that India has always been an expensive market. Thus, this does not pose such a big risk.

There are a couple of risks that investors should be wary of, say analysts: Indian elections, where any change in government can upend equities, and crude oil prices, which if remain elevated will keep inflation high and margins of companies lower.

“With strong earnings, macro stability and domestic flows, it is hard to argue against India's investment case,” said Ridham Desai, Equity Strategist at Morgan Stanley India Company. “That said, an event-heavy calendar with potential binary outcomes sets the market up for volatility, after having been less volatile than ever.”

In its base case, Morgan Stanley projects a 14 percent upside to BSE Sensex for December 2024 (target of 74,000). It assumes continuity of the government with a majority mandate resulting in stable policy, the RBI executing a calibrated exit from its current hold stance, robust domestic growth, the US not slipping into a protracted recession and benign oil prices for its estimates. In its bull and bear cases, Sensex targets are 86,000 and 51,000, respectively.

What gives more confidence to market bulls is continuous support from retail investors in terms of mutual fund investments. Even in case of some risky event transpiring the inflow will likely provide support to equities.

How to position yourself

Domestic cyclicals are gaining favour among analysts. Desai said domestic growth is likely to stay strong with benign inflation – which historically has been a perfect combination for domestic cyclicals, setting the stage for the outperformance of financial, consumer and industrial cyclicals.

He said that unless election outcomes prove unfavourable for markets, defensives including consumer staples, utilities, healthcare and telecoms are likely to underperform in 2024.

Barclays concurred and said from a sectoral or thematic perspective, domestic cyclicals such as infrastructure, capital goods, financials, and consumer discretionary appear well-positioned, as they should be the main contributors to earnings growth, going forward. Meanwhile, global cyclicals like metals and technology seem more challenged, it added.

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