According to a recent UBS report, Indian equities are on a relentless upward trajectory, supported by robust macroeconomic fundamentals, strong corporate fundamentals and strong domestic equity inflows. Despite increased volatility due to global issues, the Indian stock market has hit all-time highs. Of particular note is the impressive performance of small and mid-cap companies (SMIDs) over the past few years.
As fourth-quarter earnings season progresses, early reports point to improving quality of earnings growth. With more than half of the BSE100 companies reporting, there has been a noticeable increase in the number of hits versus misses. Sectors such as consumer durables, metals and mining, information technology, healthcare, automobiles, cement and financials posted positive surprises in earnings growth, while others such as oil and gas, chemicals and industrials saw more serious disappointments.
Despite global headwinds, domestic mutual funds continue to support the market, offsetting the outflow of foreign portfolio investors. However, UBS advises caution on SMID companies due to their high valuations. These companies have significantly outperformed large-cap stocks in recent years, causing sharp differences in valuations. UBS suggests investors take profits in SMID and shift their focus to large-cap companies, which are relatively better positioned in terms of earnings growth and resilience to higher oil prices.
Looking ahead, UBS maintains a positive outlook on earnings growth, forecasting a 12-13% increase in FY25. However, amid global uncertainty and ongoing elections in India, market sentiment may deteriorate in the short term. However, UBS expects any correction to be limited given the strong macroeconomic backdrop and strong corporate earnings.
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In identifying key risks for Indian markets, UBS highlights factors such as political instability during elections, potential delays in the US rate cut cycle and geopolitical shocks such as oil price hikes. Despite these risks, UBS recommends strategically focusing on domestically-related sectors such as autos, consumer durables, industrials/infrastructure, utilities and real estate, which offer long-term growth prospects supported by stable earnings and healthy balance sheets.
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