FY25 as weak-earnings year is gradually getting priced in: Chhaochharia

Chhaochharia highlighted that FY25's weak earnings growth is now being factored into market expectations

Even as many blame record foreign portfolio outflows for the market downturn, the real culprit is weak earnings amid rich valuations, says GAUTAM CHHAOCHHARIA, head of global markets, India, UBS. In an interview with Samie Modak in Mumbai ahead of the UBS India Summit, Chhaochharia highlights that 2024-25 (FY25) weak earnings growth is now factoring into market expectations. Investors are shifting their focus to the actions of the Reserve Bank of India (RBI) and the central government, as well as the outcome of upcoming state elections. Edited excerpts:

 

Indian markets have come off sharply from their highs in September. What has triggered this fall?

Many in the market mention record foreign portfolio outflows. Let’s not look at these numbers only in absolute terms. In terms of percentage of market capitalisation or percentage of holdings, the selloff isn’t off the charts. The key, in our view, has been weak earnings in the context of rich valuations. Markets were expecting a weak second-quarter (Q2) earnings season, but the actual numbers were worse than these already low expectations.

 

Will foreign portfolio investor (FPI) selling continue? What will it take for foreign outflows to stem the tide?

Our view is that post-US election results, the policy landscape there may be unfavourable for emerging market (EM) equities compared to US equities. India is better positioned among EMs in the context of the US policy landscape, though this may also be reflected in valuations as markets have been anticipating the outcome. So, some selling may continue, but interest from FPIs remains elevated, as seen in the attendance at our UBS India Summit. Key to stemming the flows remains a supportive local policy environment and a growth recovery.

 

Will Indian markets continue to enjoy the support of domestic institutional investors?

That looks like a likely scenario to me. Local retail investors have seen three meaningful market corrections in the past decade, and the flows have only continued to rise. On the fundamental side, while there is short-term growth moderation, the medium-term outlook remains robust, which should underpin domestic flows.

 

With China markets doing well and stimulus measures by Beijing, will the India premium narrow further?

That depends much more on China’s multiples going up and less on India’s multiples correcting. It depends on the scale and timing of further stimulus measures from China.

 

Strong earnings growth was seen as the key reason behind India’s attractiveness. With earnings disappointment in Q2, we could see flat earnings growth in FY25. Is that a cause for concern?

FY25 being a weak earnings year is now well understood and gradually getting priced in. The key remains the outlook beyond that. The policy stance by both the RBI and the central government, a stronger push for reforms, and the political economy after the upcoming state elections will drive that outlook. Our base case is for earnings to recover in 2025-26.

 

What are the other key headwinds and tailwinds for Indian equities? What are the next big triggers?

A headwind is the near-term growth and political economy concern, while local flows continue to be a tailwind. Key triggers ahead would be any major policy steps by the US, a stronger push for reforms, and, most importantly, policy loosening.

 

Which sectors/themes are you bullish on?

Given the recent market correction and growth concerns, we think this is more of a stock-specific market rather than one suited for a big sector-level thematic view. Our strategist remains overweight on utilities and cement and underweight on automotive and consumer discretionary.