Why UBS Sees India As An Attractive Investment Opportunity Despite Global Risks | Top Sector Picks

[00:00:00]Now, UBS is turning bullish on India and upgrading it to an attractive pointing to firm capex momentum and early growth in uh the loans as well as uh uh pay hikes fueling consumption. Their read is that India's structural story is outweighing the volatility. Uh Hartmut Issel, who is a head of equity and credit APAC uh as and as well as chief invest- investment officer at UBS Wealth Management, joining us right now. Uh Hartmut, thanks so much for taking the time. And uh we're speaking on a day when uh the external factors uh weighing on sentiment for risk assets here in India.

[00:00:39]So, while that domestic story as you've pointed out has been resilient, it keeps getting challenged from the external front. Crude oil is a big concern. So, how do you juxtapose the two?

[00:00:50]>> Yes. No, you're absolutely right. And I would agree that this is um certainly there's some vulnerability there. But then again, I look at at the market, right? Also year-to-date or even you know, 2 years the the last couple couple of of quarters, basically, we're seeing also a flat trajectory. And recently, it's not least because of higher oil prices, also a bit of downward trajectory. But then, we think, okay, 6 months out, 12 months out, end of this year, maybe middle of next year, right? These especially on the oil side, especially Strait of Hormuz issues, right? Things are settled, then why wouldn't you invest there now when you can invest at these relatively low level?

[00:01:31]>> Hartmut, good morning. Uh so, I I would presume when I was reading your note, and the note said, "Good morning, this is Neeraj here, of course." That uh you see catalyst for a turnaround emerging in a compelling entry point for India. Did that bake in a possibility of crude prices again moving higher, which they have? And pending that, or or let's put it this way, if that were to reverse, then great. The The The belief stays, but if they were not to reverse, would the theory around the compelling entry point get delayed a bit?

[00:02:08]>> Yes. On the oil side On the oil price side comes, as we all know, from Strait of Hormuz tensions, etc. So, we need to have a base case, which is also our base case, right? That let's say, as I mentioned, right? Say end end of the year, uh these issues are settled. I mean, among other things, you have a midterm election coming up in the US. And, of course, the Iranian side also has an interest in actually shipping out the the oil and selling it to the world. So, you have a bit of ultimate alignment there on on both sides. And, yeah, how do you negotiate? Yeah, of course, that is is is never a a straight and easy answer. But, the the the end game, I think, we can define as this in our base case. And, when that is the case, so we're not talking about maybe next month, maybe oil price is a bit higher is possible. But, but towards, you know, fourth quarter, end of the year, right? The situation is solved, and of course, the market takes a different view on things, especially here on the oil prices. And, I think we can preempt that.

[00:03:04]>> Okay. Morning, Hartmut. Tamanna, yeah.

[00:03:06]You know, I'm I'm just wondering how, when you look at what the situation is, how do you account for a sudden and swift reversal?

[00:03:17]Because, we've seen that playing out a couple of times now, where it seems like the two sides are coming to a brink, and then there's a quick reversal.

[00:03:25]Uh does that on end balance things out when you look at India from the time span of a year, where we've had these highs and lows coming in?

[00:03:37]>> Yeah. Look, Strait of Hormuz is one reason. So, so we we are looking at a market here, let's say a nifty, right?

[00:03:44]It's actually outright a bit down year year to date, right? So, a lot of concerns are in.

[00:03:50]And, Strait of Hormuz is one. or I hope I was able to convince all the our our viewers that yeah, right we we we look a little bit out there is a solution most likely inside here. The other part is also what we of course here also from our location Singapore right with many global investors. What we of course also notice is that also here for our region a bit broader say say Asia.

[00:04:13]Right? The first half was was basically the the the rule was that many especially global investors, they wanted to go to air related markets and of course we have two in the north here which is Taiwan and Korea.

[00:04:24]Right?

[00:04:25]My playbook or our playbook also here for the second half is right. So you have a big differential between Taiwan Korea earnings growth and let's say in India Nifty earnings growth this year, but next year nobody goes down, but the difference will also be a bit smaller and I would argue we have also in the in the March quarter for for India we have seen that you know, compared to the last two years which were unusually low.

[00:04:50]Mid single digits for for for Nifty earnings growth and in our numbers, you don't get that very often right? They're already starting to pick up. So next year when the differential between the North Asia and let's say also Nifty right these markets reduce a little bit every investor will put on a different lens and say yeah, I cannot be out of the India market. We think that's a good timing right now.

[00:05:13]>> So the good timing right now is not despite India not having an AI play, but because of it. Am I understanding that correctly because in relative terms it's looking like a safer heaven while we see all of this upheaval in markets like Korea?

[00:05:33]>> Yeah.

[00:05:33]Basically what I'm suggesting is that also we had these two north Asian markets that that I mentioned right? You look at how they have performed, you look at how a non air market more or less right that like India has also performed.

[00:05:46]So people have priced some investors have priced something in, right? That's a big difference.

[00:05:51]However, in terms of earnings growth next year, and we're only halfway a half year away from next year, right?

[00:05:58]The differential will will narrow, right? So, naturally for the second half, I think every also global investor will ask themselves, now yeah, right?

[00:06:07]What is the playbook from here on? And it cannot be that I have only AI exposure. I'm not saying you shouldn't have any, but only AI exposure and not nothing else. We also have a growth market when India, I think earnings-wise that comes also back very clearly as a growth market just for a different reason. Maybe not so much AI. I need both.

[00:06:25]This is a bit the thinking here behind.

[00:06:28]>> Hardwood, so then essentially the point comes back to saying that FY 28 you're anticipating that the earnings growth trajectory and picture will be dramatically different from what you saw in FY 26 and also FY 27 for the large Indian companies to certain extent and also from the perspective of the base and I guess what happens to the artificial intelligence related companies as well, right?

[00:06:53]I take that point entirely. But if you're looking at the the fabric of of the offerings available in the large cap cohort, which I'm guessing is what you look at.

[00:07:04]What looks the most attractive? Because even within that there could be different themes that emerge, some growing significantly faster than the others.

[00:07:14]>> Yes. I would say where we focus a bit in particular is actually is the banks.

[00:07:20]And and yeah, I mean we we we're all aware. If I look 12 months back, 18 months back, if I look at where you know, just the system long growth, where it is now, I mean it's almost doubled.

[00:07:28]Right? So, so why shouldn't the bank stocks respond a little bit more than they have already?

[00:07:33]I'm also trying to dissect a little bit, you know, anything that is in close, maybe not fully AI, but at least data centers, right? So, so um, industrial stocks, for example, those where we have a bit little bit of of relief into that, that is interesting. And we heard also on the program here, and this is perhaps a bit conscientious, right? Or anti-conscientious, I should say right now.

[00:07:54]Who were perceived as at least previously as perhaps losers from the from the AI trend, right? So, we had, um, IT service companies, but they were they were pulled down. Um, maybe even on the on the travel side, some of those. But I also think, um, everybody, investors in particular, can take a different lens again. It seems to start happening, actually. Right? So, um, if if I sort of pronounce something other than banks and also maybe some of the industrial companies, I would say why not looking giving a fresh new look at IT services.

[00:08:29]I I think the market has punished them overly, that's my view.

[00:08:33]And then maybe also other ones, for example, on the on the travel side, which is maybe more straightforward, partially AI, could also come back more once things are a bit calmer there.

[00:08:44]>> Hartmut, and and and it's interesting you say that because, uh, three or four of the well-pronounced IT names have actually said that AI is no longer the disrupter but an enabler of future businesses, if you will. I think we we had TCS sounding very confident about that outcome, as was, um, HCL Technologies, and as was a company called Emphasis that we spoke to today. So, very interesting that you say that about IT services. Uh, the question follow-up question that I have, Hartmut, for you is what within the uh, I mean, for India, traditionally, pharma was known as the beacon of manufacturing, if you will, right? For for for exporting globally, etc. Now, we're seeing a bunch of other sectors come to the fore.

[00:09:28]What within that manufacturing landscape do you like? Because there's a lot of emphasis from the government as well on manufacturing in India.

[00:09:38]>> Uh, since you mentioned the farmer side, I mean if if we have a focus on certain sectors, we also need to defocus a little bit on on other so so right now we don't have uh in our selections a lot of farmer names in here.

[00:09:51]So, yeah, therefore I would also say maybe it's not directly manufacturing, but you raised a very interesting point here on the IT services side. I wouldn't actually go as far as saying nothing can be or will be displaced. There are but you know, we have seen it in previous tech cycles too, right? There are areas that that or at least parts of the of the revenue breakup basically of the of the IT services companies. Yes, there is some some pressure, there's deflation.

[00:10:15]You need to reprice things etc. etc. But as you also rightly mentioned and I think the market also didn't focus enough on it. Right? We have also a part of the revenue chain of the IT services companies. Yeah, we've seen we've seen triple-digit growth, but it's also so they're just starting.

[00:10:32]And the market is often in every tech cycle by the way. The market is often a bit slow, right? They first see the downside and say, "Oh yeah, there will be I don't know, fewer headcounts and all these things." And then they say, "But wait a minute, there is new areas coming up. Who's going to integrate it for me? Is it going to be language model providers? Is it going to be hyperscalers?"

[00:10:48]We know who it will be, right? And therefore again as an investor, I think one can be early saying, "Hey, let's take a different view here also on the IT services."

[00:10:57]>> Okay. Atman, the other thing is um you reckon foreign investors which have largely been absent from the action or have been present but on the selling side in India and a few other markets for a really long time now. When when is the tipping point? Is it when there's a conclusive end to this Middle Eastern conflict or could there be other factors at play?

[00:11:18]>> Yeah.

[00:11:20]Middle East is one. Uh so we already talked about it, but you you're absolutely right. Potentially also another factor, right? Which one is that? Right? So the markets that are that are mentioned, right? Semiconductor related, especially here in our region in the in the north of the of the region.

[00:11:35]So, what is happening? What What also many of course the global investors also ask themselves, right? Because technology functions typically in cycles, right? And this this cycle AI is is is is no different. This is also to to some extent a cycle. So, what happens here, right? So, So, right now we have and let me go maybe a bit outside India for for a moment, whether it's China, whether it's um US is actually fairly similar, right? So, you have these so-called hyperscalers, so anybody who runs a cloud.

[00:12:01]Um they see in that demand, and that's positive, right? The demand is there.

[00:12:04]There's no no question Nobody questions the AI demand.

[00:12:08]But how does it get uh distributed in the chain? So, the hyperscalers first because they you know, before they can actually sell something, they need to build the factory. Before they build the factory, they or or the the data data center, they need servers, and before they have the servers, they need the components, i.e. the chips, right? But at some stage, right? And given how much the the hyperscalers already up with with their capex, right? Whether it's next year or the year after, but it will come also a time where of course they cannot you cannot double your capex every year.

[00:12:35]Right? So, that means then also, now how does it look on the semiconductor side?

[00:12:38]And of course everybody's thinking about how do I time these things, right? So, from that point of view, right? Um you you also the the point that I made earlier, right? For for next year for both our our North Asian markets, you will still have earnings growth, but not nearly as high as this year. Basic facts, right? And then you will have an an a nifty that in in my calculation comes back to a double-digit earnings growth, you will take a different look at your portfolio.

[00:13:03]>> That's a good point. Hardik, then from uh outside of all that we've spoken about so far, let me ask you about two more aspects that would weigh in, I think, uh from the perspective of the foreign investor, which is the risk-free rate.

[00:13:17]Uh with bond yields in the US going up to as much as they have, and the possibility that they could stay elevated, could even go up if the monetary policy stance changes.

[00:13:25]Uh and the other aspect is currency from India's perspective. You already have seen over the course of the last year and a half to 2 years a dramatic fall in the Indian rupee.

[00:13:36]How would you view these two things that you may not be able to entirely predict when you think about deploying at this juncture?

[00:13:46]>> Yeah. Maybe I'll start with the currency first and but that's something we we always had. This is not actually a new phenomenon.

[00:13:55]So, what are we looking at here? If if you go you know over two and a half decades basically, right? So, let's say you start you start in 2000 and then you look at the Nifty for example, right?

[00:14:05]So, one of the best one of the best by far, huh?

[00:14:09]Top notch performance year by year even if you put it into US dollars. Naturally, we all know, right?

[00:14:17]So, typically 2% 3% you you know, if if if your home currency is dollars like like many of of our investors have that, right? You deduct a little bit but still even if you do that at least in the last two and a half two and a half decades, you got a low but still double-digit return on your on your investments, right? So, I wouldn't overemphasize too much that rupee you typically you make that bit bit of a reduction but it's still even on US dollars it looks very very strong.

[00:14:47]Then when we come to the let's say Fed side maybe also bond side we're also bit surprised with because really what what had brought up the the inflation side recently, yeah? For the most part oil prices to some extent maybe also the the the tariffs but I mean this this this anniversaries that is already in the base for for more than a year now. So, we're seeing these kind of elements at least stabilizing in some cases even slightly coming off. So, the question is do bond yields have to rise a lot also globally or does does the Fed really you know, are we ahead here of a four six times rate hike cycle? Looks very very unlikely. As a matter of fact, we we think more likely than not the Fed might not even do much at all this for the rest of this year.

[00:15:31]>> Hartmut, you are I think one of the very clear voices that are seeing merit in Indian markets when a lot of others haven't. Is it restricted to the large cap stocks that you see in the Nifty or have you gone deeper down? Because that's where most investors are finding more value.

[00:15:50]>> Yes.

[00:15:51]Now I would say on the stocks we directly cover it's more the the large caps. But then again, as we as we often emphasize and and yes, we have as I mentioned before, and we have a lot of global clients and then you know, buying buying stocks in in Mumbai for many for many that's out of reach anyway. Now you can buy maybe a handful somewhere in the US or maybe maybe UK. Um that is probably not the approach, especially when some of our investors so that they're not even so familiar or they think, oh, I need to think about India, one of the largest economy maybe maybe by end of this decade third largest economy. I cannot completely be be out of it. How do I locate it? Then probably a more sort of diversified solution than what it's I don't know, some certain funds or maybe maybe a ETF, something like that.

[00:16:34]That's probably better.

[00:16:35]And then in those you will typically also find some of the smaller ones before you go out and say, okay, you know, again, but if you sit in I don't know, Europe, if you sit sit close to China, if you sit in the US, oh, I want to pick this small cap, this small cap.

[00:16:49]You say, look, you diversified, you you have part of it in your portfolio. Then I think that's the right approach for our global investors.

[00:16:56]>> Um Hartmut, pleasure speaking with you.

[00:16:59]Vielen Dank and auf Wiedersehen.