UBS Challenges India's 60% Valuation Premium Over Emerging Market Peers

UBS Group AG is waving a caution flag. The Swiss investment bank is concerned that India’s stock market is overvalued, especially when compared to other emerging markets. According to them, India’s hefty 60% valuation premium doesn’t align with the country’s actual economic performance. Translation? Investors might want to take a closer look before diving in.

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Why the Big Gap in Valuations?

Currently, Indian stocks, particularly those included in the MSCI India Index, are trading at approximately 24 times their expected earnings. Compare that to China, where the multiple is just 10. That’s a big difference. It also pushed India’s share of the MSCI Emerging Markets Index to nearly 20%, up from only 6–7% ten years ago. Meanwhile, China’s slice has shrunk dramatically, falling from over 40% in 2020 to about 25% today.

UBS strategist Sunil Tirumalai explains that India’s stock market boom is driven more by investor excitement than real earnings growth. Simply put, prices are rising faster than profits can cover.

Slower Growth Ahead? UBS Thinks So

UBS also points to signs that India’s economy, valued at $4 trillion, is slowing down. They’re seeing a few red flags: slower credit growth, falling foreign investment, weak exports, and limited earnings potential. The bank expects sustainable credit growth to dip from 16% to around 10% per year. One reason? A high loan-to-deposit ratio of 80% could limit future lending.

They also predict India’s GDP will grow by 7% in the 2024–25 fiscal year, slightly down from this year’s estimated 7.6%. The slowdown, they say, is being fuelled by weaker global demand and lower government spending on infrastructure.

So What’s Holding the Market Up?

A big reason Indian stocks have stayed high is domestic investment. Since the pandemic, money from Indian households has surged into the market. Between 2021 and 2023, domestic inflows jumped to $29 billion annually, more than double the average from 2016 to 2020. That boom is primarily thanks to a young, tech-savvy population with greater access to online investing platforms.

This local money has helped cushion India’s markets from global shocks. However, UBS warns that if the economy doesn’t back up the hype, this kind of support may not last forever.

Valuations Are Coming Back to Earth, But Not All the Way

Recent market pullbacks have helped cool things off. The Nifty 50, India’s primary stock index, has declined by 15% over the last six months. That’s helped bring the valuation premium closer to its 10-year average, down to 50% from the previous 60%.

Still, UBS isn’t ready to celebrate. They believe the market may need to fall further before it genuinely reflects the state of India’s economy.

Looking Ahead: Optimism Meets Reality

There’s no denying the long-term potential of India’s economy. However, UBS emphasises the importance of not ignoring the short-term risks. These include political uncertainty (especially with elections), delays in interest rate cuts, and global tensions that could spike oil prices, raising inflation and hurting business profits.

Bottom line: UBS thinks India’s market is promising but overhyped. Investors would be wise to weigh the risks before assuming the rally will last.