India is among the least favoured markets in Asia: Sunil Tirumalai of UBS

As liquidity starts drying up, banks rates start rising and market returns struggle, we expect some level of softness in household market allocations, he said

Rising interest rates and winding down of the bond-buying program by the US Federal Reserve has dented the equity markets across the globe. SUNIL TIRUMALAI, strategist at UBS Securities India, tells Puneet Wadhwa in an interview that the marginal retail investor is already sitting on over 10 per cent losses on the money s/he incrementally invested in 2021. Edited excerpts:

Do you think equities as an asset class will underperform other investment avenues? 

Overall, while Indian bonds have themselves become expensive in an emerging market (EM) context, the relationship between Indian equities and bonds is also skewed in favour of the former being expensive. Given such a context, we see a high chance of Indian equities underperforming Indian bonds.

Will a recovery in the markets be driven more by domestic factors or global?

In our view, the behavior of the Indian households, particularly with respect to investment asset allocation, is key to markets over the next 12 months. Over the last five – six years, and particularly in the last 12-15 months, the Indian household has become the dominant investor in the market, more like a price-setter. A couple of years of heavy savings build-up (thanks to lock-downs), rock-bottom headline returns on traditional avenues like bank deposits, and sharp rally in markets for an extended 15 month period – have led to this love for markets. However, we would be wary of extrapolating this as a long term trend.

Can this allocation to equities by households thin going ahead?

As liquidity starts drying up, banks rates start rising and market returns struggle, we expect some level of softness in household market allocations. In fact, the marginal retail investor is already sitting on over 10 per cent losses on the money s/he incrementally invested in 2021 – since bulk of the investment happened at the top of the market in December 2021 quarter. The expected slowdown in flows may not affect earnings at the market level, but can surely influence valuations. For foreign investors, the selling has indeed been pretty intense already. However, the higher relative valuations in India may prevent a quick return to buying.

What’s your stand on EM, and on Indian equities? UBS had a Nifty year-end target of 16,000.

UBS is more cautious on EM equities in global context than other parts of global economy. Within EMs, India is among the least favoured markets in Asia. The bigger risk that is causing our year-end target for Nifty to be below consensus is valuations, rather than earnings. With rates rising across the world (including in India), we see the rub-off on valuations going forward.

Would you describe Indian equities as a sell on a rally or buy on a dip? 

We are cautious on the market with a 12-month view. The high conviction overweight stance for us is banks – they score well on valuations, relative rates sensitivity, and macro picture on asset quality

The high conviction underweight for us is consumption (staples and discretionary) – high valuations, higher sensitivity to rates rise, and linkage to domestic factors.

Are we in for a few quarters of earnings downgrades as India Inc battles rising input cost? 

Higher commodity prices may be bad for the Indian economy, but we should be careful in extrapolating these views onto the market. The mainstream indices have a generous representation of stocks that may actually benefit from commodity inflation. This is clearly visible in Nifty earnings per share (EPS) holding up since the start of 2022, thanks to concentrated upgrades in a few commodities linked sectors. Overall, we do not see too much downside to current consensus at the index level. Of course, some sectors are likely to see cuts, like consumption.


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