UBS Group AG has advised investors to short India’s rupee and reduce exposure to the nation’s stocks, citing concerns over a deepening economic slowdown. The bank’s analysis suggests that India’s $4 trillion economy is entering a structural deceleration, driven by factors beyond cyclical influences like oil-price fluctuations and government spending cuts.
According to UBS, the slowdown is attributed to long-term trends, including a decline in credit growth, foreign direct investment, export competitiveness, and overall earnings potential. The bank’s research suggests that these factors point to a deeper, sustained downturn.
Manik Narain, head of Emerging Market Strategy at UBS, questioned the common belief that India is less vulnerable to external risks, especially with the potential for a prolonged period of high U.S. Treasury yields. “India’s growth faces significant challenges, particularly given its one of the highest debt service-to-revenue ratios among major emerging markets,” Narain noted.
Indian markets have seen significant losses recently, with Indian stocks losing nearly $500 billion in market value over the past month. The MSCI index for India has posted its worst start to a year since 2016, and the rupee has fallen to consecutive record lows against the U.S. dollar, making it the worst-performing currency in Asia over the last month. Meanwhile, the country’s bonds have experienced rapid outflows, marking the steepest withdrawals since 2020 as investor enthusiasm wanes following the bonds’ inclusion in global indexes.
This market slump follows a noticeable decline in real GDP growth, with India’s economy falling below the pre-pandemic average of 7%. Underperforming business results, particularly from companies in the Sensex index that have consistently failed to meet analyst expectations, have further dampened sentiment. External risks, including rising U.S. Treasury yields, have left policymakers hesitant to prioritize growth.
Narain also highlighted that the slowdown is spreading to defensive sectors like consumer staples, indicating that the factors driving this downturn are not temporary. He suggested that the moderation in earnings growth reflects broader, structural challenges rather than isolated events like changes in government spending.
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