The Indian stock market is witnessing a sharp correction and the benchmark Nifty 50 index has dropped more than 4% from its record high level. Sustained foreign capital outflows, muted Q4 corporate earnings and general election jitters are weighing on market sentiment.

Indian equities are likely to trade with a downward bias ahead of general elections results, but analysts do not expect a prolonged correction with the market expected to offer buy-on-dip opportunities.

Premal Kamdar, Analyst at UBS Securities said he remains cautious on small- and midcap (SMID) companies due to rich valuations and downside earnings risk in a higher oil price scenario.

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In its monthly outlook report, the UBS analyst remains upbeat on India’s economic outlook, supported by better-than-expected momentum in domestic economic activities. However, geopolitical uncertainty could pose downside risks.

Let us take a look at UBS outlook on Indian stock market, economy, fixed income securities and currency.

Equities

UBS believes the earnings growth outlook remains healthy. However, the focus could likely shift towards revenue growth as the tailwinds from margin expansion are largely behind. It expects the Nifty 50 to grow earnings at 12–13% in FY25.

“Amid global headwinds and ongoing general elections in India, we expect Indian equities to trade with a downward bias in the near term. However, we do not expect a deep and prolonged correction as the combination of resilient macro, healthy corporate earnings, and robust equity inflows should limit downside and offer buy-on-dip opportunities, in our view. We expect a low-teen upside for the Nifty index by March 2025,” said Kamdar.

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UBS is cautious on smallcap and midcap (SMID) companies due to rich valuations and downside earnings risk in a higher oil price scenario and prefers large-cap companies over small and midcaps companies given steep valuation differentials despite superior profitability and relatively lower sensitivity to higher oil prices.

Kamdar recommends investors take profits in SMIDs and increase exposure to large-caps.

“We currently prefer domestic-linked sectors (like autos, consumer durables, industrials/infrastructure, utilities, and real estate) as they provide good long-term growth visibility led by strong order books, stable margins, and healthy balance sheets, over export-linked sectors (like IT, chemicals, and metals and mining) that are still vulnerable to uncertainty in the global growth outlook,” he said.

Fixed Income

The Reserve Bank of India (RBI) is likely to continue with its policy stance for some time and given the current global and domestic macro backdrop, UBS sees limited room for rate cuts this year. It expects a shallow rate-cut cycle of 50 bps by the RBI likely to commence in 2025.

Kamdar expects the 10-year Indian bond yield to remain rangebound in the near term before gradually dropping by 50– 75 bps by the end of the next financial year.

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“Our view is supported by resilient macro conditions, fiscal consolidation leading to lower borrowings, and Indian government bond inclusion in global J.P. Morgan and Bloomberg bond indices leading to sizable FPI inflows in the debt market. Amid higher uncertainty about the timing of rate cuts, we see medium to long duration bonds in a sweet spot as they not only benefit from the bull steepening helped by improved liquidity conditions, but are also well positioned to gain from rate cuts as and when they happen,” he said.

Rupee

India’s resilient macro conditions, strong external buffers and steady FPI inflows driven by global bond index inclusion bode well for the rupee stability. Nevertheless, the recent strength in the USD index against the unfavorable backdrop of higher-for-longer interest rates dampens the sentiment for all emerging market currencies including the rupee, the UBS report said.

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Indian Economy

India’s economic outlook appears strong as domestic economic activity continues to expand, supported by the momentum in investment demand and an improving global environment. UBS lifts its FY24 real GDP forecasts to 8% YoY from 7.6% earlier on stronger-than-expected economic momentum in the March quarter.

While it remains upbeat on India’s GDP growth outlook and expects real GDP growth of 7% YoY in both FY25E and FY26E, it sees some macro risks emerging due to rising geopolitical tensions that can pose risks to our growth outlook.

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Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.