ETMarkets Smart Talk: US policy changes could benefit Indian IT sector; Utilities and Industrials favored by UBS

“India is better positioned amongst EMs in context of impact from US policy landscape, though may be also reflected in valuations as markets have been anticipating the outcome,” says Gautam Chhaochharia - Head of Global Markets, India – UBS.

In an interview with ETMarkets, Chhaochharia said: “IT Services sector may potentially benefit from US corporate tax cuts and thus higher spending, despite some worries around Visas” Edited excerpts:

Thanks for taking the time out. What’s your perspective on the markets at current levels? With over Rs 1 lakh crore in FII outflows and a depreciating rupee, what strategy are you planning to follow for the next 12 months?

Firstly, let’s not look at these numbers in absolute terms but also in terms of % of market cap or % of their holdings, in which case they are not off the charts.

Despite the correction, valuations reman elevated, especially for small caps. Markets were anticipating a weak 2Q earnings season, but the actual numbers were worse than these weak expectations.

So, any sustained upmove for Indian markets may take some more time beyond the next 3 months. Post that, local policy stance (fiscal and monetary both) and growth data will be the key.

There is adequate local flows and cash levels with local funds to drive market up if fundamentals become supportive

As someone who closely tracks global markets, how does India compare to other emerging markets following the recent rally that pushed the Sensex past 85,000 and the Nifty50 above 26,000?
India’s relative valuations became very rich. While long-term growth potential for India remains intact and likely much ahead of other EMs, near term growth for India don’t really stand out.

Our EM strategist has been and remains Underweight India relative to EM.

What are the key trends currently shaping global equity markets?
Key trend for global equity markets is now around the post US elections policy landscape. These include US corporate tax cuts, tariffs on all imports into the US (60% of China and 10% rest of the world), potential scale back in climate initiatives like IRA subsidies, nudging governments worldwide to scale up national defence expenses and devaluing the dollar.

Our view is that this may be unfavourable for EM equities vs US equities.

What impact will US election might have on Indian markets or any sector(s) in particular?
India is better positioned amongst EMs in context of impact from US policy landscape, though may be also reflected in valuations as markets have been anticipating the outcome.

IT Services sector may potentially benefit from US corporate tax cuts and thus higher spending, despite some worries around Visas.

FII exodus, fall in rupee, muted earnings and slowdown fears are some of the factors weighing on Indian markets. But, Indian market has been resilient – is it DII money (SIP money) which is acting as a big support?
Yes absolutely and there is credibility building up on the argument of it assuming structural trend. Local retail investors have seen 3 meaningful market corrections in the last decade and the flows have only continued going up.

On the fundamental side, while there is short term growth moderation, the medium-term outlooks remains robust. This also helps markets resilience

What is your take on the outcome of the US Fed meeting (6-7 November) and its impact on equity markets?
The federal funds rate is now 75 bp lower than the range that prevailed from July 2023 until September 2024, though was as expected.

The FOMC maintained the risk assessment, "the risks to achieving its employment and inflation goals are roughly in balance." The yield though have moved up post election results. So clearly, for now, Fed rate cut appears to be less of a factor

What about sectors – which sectors are you overweight and underweight on?
Our strategist is Overweight Utilities and Industrials and Underweight Auto and Consumer Discretionary.

Beyond these our analysts have been downgrading stocks in Industrials, have been cautious selectively in some Financial names (around NPL concerns specific to some segments) and also Pharma.

Across sectors, there are many bottom-up opportunities, which is very typical of Indian markets

We have seen some selloff in mid & small cap space in the last 12 months. How are you approaching this space now? Is it looking overvalued?
Yes, this space still looks overvalued so we continue to advise caution. Though again our analysts see bottom up opportunities in some names – where growth visibility remains high and has potential to surprise market expectations

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)