UBS says Indian equities “extremely expensive”; double upgrades China to 'overweight'

UBS has made some significant changes in its market positioning by lifting China to overweight, and generally reducing the cyclical markets to neutral or underweight.

Near-term downgrades in earnings likely; valuations biggest risk for market: Geosphere Capital

“Our major thematic call from mid 2020 through mid 2021 was to overweight the cyclical markets. Since early summer this year, we've been gradually backing-off that call, as various cyclical data peaks and valuations have reached expensive levels,” UBS said.

“We're already underweight Taiwan, but cut Australia to underweight (materials is one of our least preferred cyclical sectors), and take Japan and Korea to neutral,” the brokerage added.

The brokerage has an ‘underweight’ stance on India. UBS said retail investors in India and Taiwan played an outsized role.

The earnings momentum was also seen fading in the Indian markets, the note by UBS said, adding there was little scope for economic recovery this year. Apart from this, low real yield and expensive currency make India vulnerable to tapering by the US Federal Reserve.

Indian stocks breached record levels as domestic and foreign investors piled into stocks. The benchmark Nifty 50 is so far the best performer in Asia, clocking a nearly 31 percent rise year-to-date.

Another interesting point is that UBS has double upgraded its stance on Chinese equities to “overweight”.

For China, UBS sees relative earnings and valuations bounce back in 2022 after a poor show this year. The tighter monetary policies in China since 2020 have worked through the economy, especially in the realty sector.

Stock valuations have retreated, especially for the Internet companies, and regulatory concerns seem to be overdone, the brokerage said explaining the double upgrade.

China, Singapore, Indonesia, Philippines and Malaysia are the most favoured markets whereas Taiwan, India and Australia are the least favoured, UBS said.