UBS signals risk of India stocks trailing bonds over next 12 months

'While the economic recovery momentum is good, we believe equity markets in India are beginning to appear stretched on valuations,' says Sunil Tirumalai of UBS

Rising commodity prices and stretched valuations are posing a risk to the rally in Indian stocks, making a case for equities to underperform local bonds over the next 12 months, according to UBS Global Research.

“Equity valuations relative to bonds are at levels seldom seen,” Sunil Tirumalai, Mumbai-based head of India strategy at UBS, said referring to the gap between the yield on India’s 10-year government notes and the earnings yield of the NSE Nifty 50 Index. “On most such occasions in history, we see equities underperform in the ensuing 12 months.”

Continuing their rally from pandemic-driven lows in March 2020, Indian