UBS’s Divya Nagarajan: Global AI trade has legs; hardly any froth in Indian markets

New business data points to the fact that Is the AI trade merely catching its breath—or approaching an inflection point? And as India navigates oil, inflation and shifting global capital flows, where are market participants finding the most compelling opportunities? Ahead of the UBS’s Investor Conference, Diviya Nagarajan speaks exclusively to Moneycontrol around the big global and domestic forces on her radar—and why, in an increasingly selective market, the old playbook may no longer be enough

1) Describe the global macroeconomic environment today

That is primarily based on how we view the global AI trade. We are still very positive on it. As long as that holds, we stay constructive on the global macro environment, led by the AI trade.

Our market observer has been continuously pushing out the forecast for when memory prices will peak every quarter, and the current view is that they will peak only in FY28, as bottom-up demand keeps be very robust. There is no major risk to that view right now, except for some concerns on the private credit side. But at this point, those risks do not appear large enough to trigger an inflection.

2) How much room does the AI trade have to run from here?

This is hard to answer, but as long as demand conditions do not change, we stay bullish.

3) How do you read into the volatility noted in Korea and Taiwan in recent months – it is being noted as a sign of the AI trade weakening…

What happened was a technical correction. Several people say this is how markets top out. But we believe the underlying demand conditions stay intact.

Traditionally, Taiwan and Korea have been seasonal plays. We have not noted this kind of expansion since the 1990s. This is a once-in-a-lifetime structural demand opportunity for these economies.

As long as the underlying demand conditions stay firm, we do not see a major threat.

4) Memory plays versus hyperscalers: where do you see the relative opportunity?

We look at it more through a developed markets versus emerging markets lens.

In developed markets, we prefer hyperscalers. In emerging markets, we prefer memory and semiconductors.

We would not look at it as one versus the other. We like both, but through different prisms.

5) SpaceX is back to its IPO price. How do you expect Anthropic to alter investor behaviour or impact markets?

Too hard to predict.

6) Do you see rising US yields as a risk to equity markets in the near or medium term?

It is all linked to the AI trade because so much credit is sloshing around to fund AI. US government bonds are becoming relatively less attractive because of the demand for AI-related credit, though our US teams believe household and corporate lending are more important drivers. The Treasury buyback was a good signalling move.

We do not see rising yields as a major risk to markets at this point.

7) Do you see the earnings recovery in India gathering momentum?

The conditions for a recovery are in place. India has been surprisingly resilient in the face of external shocks. The anticipated supply shock did not hurt us as much as feared. Some rural demand destruction happened, but urban demand has remained resilient.

Another major concern a few months ago was the severely deficient rainfall and sowing pattern. At the start of the season, we had a 20 percent shortfall; now it is down to 2 percent.

Our inflation forecast has moved up—we expect inflation to reach 5 percent by the end of the year—and crude prices stay elevated as well. It is a bit of déjà vu compared with six months ago, but we are on a better footing now.

Credit expansion is picking up and the indian rupee is more stable because of FCNR flows. So, barring the oil risk, we should see the recovery gather momentum.

8) What is your target for the Nifty?

We do not have index targets or sector weights. We look at stocks individually.

9) What are you bullish on?

We like private banks and short-cycle plays. We additionally like data centre proxies, the large consumer stocks, and quick commerce.

On IT services, we have had a wary bottom-up view. The good thing is that the IT sector is not collapsing as feared. IT hiring is picking up, which is somewhat counterintuitive.

Overall, sector calls are very constraining this time. There are tailwinds for certain sectors: the credit cycle is good, the consumption cycle is improving and automobile electrification has picked up. But beyond these structural trends, it is a pure bottom-up market.

10) What is the rationale for being bullish on private banks when expansion isn’t impressive for the top banks?

There are tailwinds to structural expansion. Around 60 percent of bank deposits come from households, so banks that have invested in their branch networks during the past couple of years should benefit.

We additionally believe the premium for private banks over state-owned enterprises will expand.

11) What is your India weight in EM portfolios now?

We are still underweight India, although there is wary optimism.

12) There has been an ebbing of FPI flows. Do you think FPI flows will pick up significantly this year?

If things hold up, market participants will come. But risks stay—oil and weather.

Right now, though, the biggest pushback against India is that we do not have an AI story.

13) There is a growing demand for easing capital upside taxes for FPIs and even cutting the STT. How important is this at this point in time?

Simplification of tax codes is definitely important. But if the question is whether this will immediately turn the tide in terms of foreign inflows, it will not.

When a market offers high returns, taxes matter less. But when returns are anaemic, taxes do hurt, which is why this may be important now.

14) Do you think IPO supply will depress secondary market prices?

Not by itself. That is a liquidity factor, and it should be manageable as long as the fundamental momentum stays intact.

The bigger risk is economic momentum. We have time-corrected during the past three years. So, if earnings momentum continues, valuations will look increasingly reasonable, creating their own virtuous cycle.

Anything that derails earnings momentum will be the key risk.

14) Where do you expect to see disappointments from a price perspective?

We hardly see any froth left in the market, and that is really the good news.

There may be some specific firms trading at earnings multiples of 100x, where we expect earnings to compound at around 40 percent or so.

If we manage to avoid weather-related inflation and an oil shock, we are in a very good place. Unfortunately, those are not factors under our control.