UBS upgrades India to neutral but continues to favor China: 4 reasons why

While revising its equity strategy for emerging markets to adopt a more defensive and domestic tilt amid rising trade uncertainties, global brokerage firm UBS has announced an upgrade of India to ‘Neutral’ from its earlier ‘Underweight’ stance, while simultaneously reaffirming its preference for China within the emerging market basket.

This move comes as part of a broader realignment that prioritizes markets with resilient earnings, domestic-focused toplines, and relatively defensive characteristics. According to UBS, while India ticks several key boxes—such as high domestic focus, earnings resilience even in extreme events, and being a beneficiary of lower oil prices—it still doesn’t quite make the cut for an ‘Overweight’ rating.

UBS has tactically shifted out of global and externally geared plays and moved into markets where local factors dominate the narrative. The firm’s scorecard now emphasizes economies that show EPS stability, low exposure to global trade shocks, and supportive bottom-up analyst views. In this context, both China and Indonesia emerge as more favorable destinations for capital allocation.

Still, the upgrade for India signals growing acknowledgment of its structural strengths, even as UBS exercises caution. The bank outlines four key reasons why, despite the improved rating, India still trails China in its pecking order:

1. Fundamentals Still Lacklustre


UBS remains unimpressed with India’s corporate earnings landscape. The report notes that stock fundamentals are “still lacklustre,” referencing sharp earnings per share (EPS) cuts while pointing to a disconnect between the optimistic macro narrative and actual earnings delivery.

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2. Policy Ambiguity on Reforms


While India has demonstrated political continuity and a strong domestic story, UBS is “unclear whether the government focus is returning to growth/investments anytime soon”, suggesting that investors may need clearer signals before a re-rating can be justified.

3. Trade Negotiation Watchpoints


Pointing out that it is hard to conclude whether India is a winner in supply chain shifts, UBS said it is also keeping a close eye on India’s ongoing trade negotiations, especially in sensitive sectors such as farm subsidies and retail. These areas could create friction or policy delays, which might cap near-term upside or introduce volatility into the broader equity story.

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4. Rich Valuations


Finally, valuation remains a key hurdle. UBS notes that India is trading at “significantly higher than history,” making it less attractive from a risk-reward perspective compared to peers. By contrast, China and Indonesia have better defensiveness, lower valuations, along with potential upside from stimulus or reversal of capital outflows.