The global brokerage firm UBS has repeated its underweight rating on Indian equities, indicating it has a pessimistic view of the market in spite of its recent performance. The main factors behind this decision are the fears of slowing the nominal GDP momentum and the existence of overstretched valuations. As global investors start to consider other emerging markets as the emerging opportunities following the technological tailwinds, India seems to be experiencing its own distinctive set of challenges preventing it from fully engaging in the current global investment narrative.

Nominal GDP growth and AI scarcity premium

The slowing of the growth of the nominal GDP of India is one of the key foundations of the UBS prudent approach. There is a crucial measure of corporate earnings that is reliant on nominal GDP because it does not have an inflation adjustment, and therefore, it directly affects the increase in top-line revenue in the listed company. 

Economists at UBS have observed that the current pace of economic growth in India is beginning to demonstrate some weaknesses as compared to the high performance experienced in the past cycles. This slowdown makes it a challenging environment in which companies can continue earning at high rates that investors have been accustomed to.

The brokerage notes that it is a clear catalyst that will be needed to restart this growth momentum; Indian stocks might not be able to explain their current pricing. This attitude is also complicated by the outside headwinds, such as a dragging trade agreement between India and the United States, which has added capital outflows and exerted more pressure on the local currency. The UBS forecasts that these integrated economic elements may result in a further weakening of the Indian rupee, which may end up at 94 against the US dollar in 2026.

One of the major issues that UBS has raised is the valuation of the Indian market. Indian stocks have been performing historically high at a time when they have performed poorly in the Indian market relative to their emerging market counterparts in 2025.

India has been trading at a 35-40% premium over the other emerging markets. In recent times, the gap has increased to more than 60%. According to UBS, these high valuations are becoming harder to sustain in the modern day, given the prevailing earnings projections.

What compounded the valuation pressure is the AI lag in India. Whereas markets such as Taiwan, South Korea, and China are reaping rewards through the worldwide boom in artificial intelligence and cloud computing capital expenditure, India does not have the number of listed firms that are direct beneficiaries of the trend.

Technology expenditure in other Asian markets, such as memory chips and AI infrastructure, has resulted in significant earnings upgrades. India, by comparison, has been left mostly out of this AI-driven earnings frenzy; its high stock prices look even more overvalued compared with its technology-intensive regional counterparts.

Internal market dynamics

According to UBS, the internal market forces are changing as well. The major market in India is already very dynamic, and a boom in Initial Public Offers (IPO) is taking up a large share of the household funds. About 25% of household flows are moving to IPOs, which is a dramatic rise compared to the pre-pandemic average of about 10%. Such a shift of capital into new listings may at times prevent the liquidity of the standard secondary market stocks, and is part of the time correction stage that UBS feels the market has already experienced.

In spite of the general rating of underweight, UBS does not predict the collapse of the market on a catastrophic scale. The brokerage anticipates that any possible correction would be limited to approximately 5%, due to the good participation of the domestic institutional and retail investors who offer a defensive bottom. Under this conservative approach, UBS remains biased towards certain aspects of the Indian economy, including the private sector banks and consumer staples industry, which they consider to be more durable in a decelerating growth environment.

Conclusion

The underweight position taken by UBS is a caution that the equity markets in India are between high expectations and a cooling economy at the moment. The issue of the low growth in nominal GDP, lack of direct recipients of AI, and ongoing valuation premium make the risk-reward profile inferior to other emerging markets. Although domestic support is a powerful stabilizing mechanism, the brokerage implies that global investors will be choosy and wary until the way to accelerate earnings and more realistic market entry points is made clear.