According to a recent report from UBS, the Indian stock market’s premium valuation is backed by both cyclical and structural tailwinds, leading the benchmark Nifty 50 to potentially reach the 25,200 level by March 2025. UBS analysts highlight India’s strong structural growth narrative compared to other large economies, combined with political stability and supportive government policies, as key factors driving this optimism. Despite the market’s year-to-date rise of 3.5% and hitting new all-time highs, the index’s current 12-month forward P/E ratio of 20.5x remains one standard deviation above its 10-year average. Premal Kamdar, Analyst at UBS Securities India, believes that India’s premium valuation is justified by the aforementioned tailwinds and political stability, along with support from falling equity risk premiums as interest rates decline. With this backdrop, Kamdar maintains that India’s high valuation is sustainable, projecting the Nifty 50 index to achieve the 25,200 milestone by March 2025, representing a potential upside of 12%. This target is based on March 2026 EPS estimates of ₹1,226 and a 12-month forward target PE multiple of 20.6x.
Following a robust performance in Indian equities, Premal Kamdar of UBS cautions investors about the possibility of profit-taking in the near term due to persisting economic and geopolitical risks. Despite this, Kamdar remains optimistic about India’s position, emphasizing that any corrections should be seen as buying opportunities given the country’s long-term structural growth potential. Kamdar specifically favors sectors with high domestic exposure such as autos, industrials, utilities, real estate, consumer durables, and healthcare. However, UBS maintains a neutral stance on Financials, FMCG, IT, Oil & Gas, and Chemicals, while showing least preference for the metals and telecom sectors. Key risks highlighted by the UBS analyst for Indian markets include unfavorable election outcomes, potential delays in the rate cut cycle, and geopolitical tensions in the Middle East leading to a surge in oil prices.
The recent inclusion of India’s government bonds in the JP Morgan Global Bond Index in June 2024 and the Bloomberg Index in January 2025 has sparked optimism among foreign investors, resulting in a surge of Foreign Portfolio Investor (FPI) flows amounting to $4.8 billion year-to-date into Indian debt markets. Looking ahead, Premal Kamdar, an analyst, anticipates policy shifts from the Reserve Bank of India (RBI), with a potential stance change to neutral in the June quarter followed by a cumulative 50 basis points (bps) rate cut in the latter half of the year. Despite the RBI’s cautious approach, factors such as fiscal consolidation and inflows related to bond index inclusion are expected to drive bond yields lower in the coming months. Kamdar forecasts the 10-year Indian government bond yield to decline to 6.25% by March 2025, signaling a positive outlook for fixed income investors.
In light of the current market conditions, Premal Kamdar advises a preference for medium- to long-duration bonds. Citing historical trends, Kamdar highlights the potential for significant returns by adopting a positive stance on long-duration bonds well in advance of the first-rate cut. With this perspective, he believes that now is an opportune moment to include long-duration Indian government bonds and AAA corporate bonds in investment portfolios. However, Kamdar also identifies key risks facing the Indian bond market, including potential delays in the commencement of the US rate cut cycle, supply shocks stemming from geopolitical tensions, heightened food inflation due to adverse weather conditions, and negative developments related to index inclusion. Investors are urged to consider these factors when making investment decisions in the bond market.
According to UBS forecasts, India’s current account deficit is projected to improve to 0.8% of GDP in FY24E, driven by a favorable trend in the trade deficit. However, heading into FY25, the deficit is expected to modestly increase to 1.3% of GDP, influenced by slowing global growth and sustained domestic demand. Despite this slight uptick, UBS remains optimistic about the current account deficit remaining well-contained, thereby bolstering support for the Indian rupee.
Regarding India’s GDP growth, UBS anticipates a moderation due to both global factors, such as weaker growth, and local factors, including softness in public capital expenditure. After estimating a 7.6% year-on-year growth for FY24, UBS projects a moderation to 7.0% and 6.8% in FY25 and FY26, respectively.
Sector-wise, UBS foresees a moderation in investment-led growth due to lower public capital expenditure, offset by a gradual recovery in consumption growth fueled by a rebound in rural growth, particularly on the expectation of a normal monsoon.
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