'Sustained mkt rally hinges on earnings revival, valuation comfort'

Indian equity valuations have corrected but remain insufficiently attractive for global investors, with earnings growth continuing to be the weak link, says Gautam Chhaochharia, head of global markets, India, at UBS. In an interview with Sundar Sethuraman and Samie Modak, in Mumbai, Chhaochharia says the recent US trade deal has removed a key near-term overhang, though any meaningful upside to the economy will take time to materialise. Edited excerpts:

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QA equity valuations have corrected but remain insufficiently attractive for global investors, with earnings growth continuing to be the weak link, says Gautam Chhaochharia, head of global markets, India, at UBS. In an interview with Sundar Sethuraman and Samie Modak, in Mumbai, Chhaochharia says the recent US trade deal has removed a key near-term overhang, though any meaningful upside to the economy will take time to materialise. Edited excerpts:

India has underperformed global markets over the past year and even this year so far. Why has India lagged despite a supportive global backdrop like debasement trends?

At the core, India is stuck in a triangle of valuations, earnings, and liquidity. Valuations remain expensive relative to peers, earnings growth has been weaker than expected, and while domestic liquidity is strong, capital raising has been even stronger— absorbing much of that liquidity. A year ago, valuations were even richer; they’ve corrected somewhat but are still not attractive enough for global investors. Earnings growth is the weak link. Some pickup is expected, but it's not yet at a level that long-term investors expect from India or relative to the region.

How does India compare with other emerging markets (EMs) on earnings and valuation?

Two years ago, global and regional earnings were weak, but now several markets— including China —are offering stronger earnings growth, aided also by technology exposure. Valuations there are also more reasonable. Historically, India’s earnings growth stood out versus peers, but this time the relative picture is different. That’s one of the unique features of the current cycle.