HSBC upgrades Indian equities to 'overweight', downgrades Chinese stocks to 'neutral'

NEW DELHI: India's prolonged stock market correction appears to have made its equities more attractive to global investors, with HSBC raising its rating on the market to 'overweight' from 'neutral'. The global financial services firm cited resilient earnings, improving growth prospects and a reset in valuations as reasons behind its more positive stance.In its latest Asia-Pacific equity strategy report, HSBC said India's investment appeal is supported by strong credit growth, improving earnings momentum and policy measures aimed at sustaining economic growth and currency stability.A key factor behind the upgrade is the correction in Indian equity valuations over several years. HSBC said this reset has made valuations more reasonable, particularly among large-cap stocks, after a period in which Indian markets underperformed other emerging markets.There could also be room for more foreign investment in Indian equities. According to the report, just 22 per cent of global emerging market (GEM) funds currently have an overweight position in India, suggesting scope for further allocations.The brokerage also pointed to the resilience of corporate earnings despite challenging macroeconomic conditions."Growth remains resilient despite a series of macro shocks (i.e., higher interest rates and oil)," the report said, adding that the pace of earnings downgrades has become significantly more modest.Another factor supporting India's appeal is its relatively low volatility and the diversification it offers. HSBC said these characteristics are particularly relevant in Asian markets, where artificial intelligence-related stocks are increasingly dominating investment opportunities.Banks, industrials and discretionary consumption among preferred betsHSBC's preferred sectors reflect its positive assessment of India's growth prospects. Banks remain among its favoured segments, with the brokerage pointing to an improved growth outlook.In the industrial space, it identified capital goods, cement, ports and electronic manufacturing services as areas offering opportunities.The brokerage also drew a distinction between consumer discretionary stocks and staples, expressing a preference for the former. Retailers and automobile companies were among its preferred segments within this category.Insurers and hospitals also remained on HSBC's positive list, with the firm highlighting their growth potential despite recent regulatory uncertainties.However, the outlook is not without risks. HSBC flagged elevated crude oil prices and the possibility of an El Niño weather pattern as potential challenges for the Indian economy.The report warned that if energy prices remain high, they could put pressure on domestic demand and the currency. Higher inflation could also weigh on consumption, with rural demand particularly vulnerable.Even so, HSBC does not expect possible earnings downgrades in the coming quarters to be large enough to significantly undermine overall market sentiment.China loses overweight statusWhile HSBC has become more positive on India, its assessment of Chinese equities has turned cautious. The brokerage cut its rating on China to 'neutral' from 'overweight', citing a lack of triggers for a sustained improvement in market valuations.This comes despite attractive valuations and recent policy support. HSBC said weak consumer confidence, persistent difficulties in the property market and softer domestic investment continue to pose challenges to China's growth outlook.Investor activity also points to weaker appetite for Chinese equities. The report highlighted subdued southbound investment flows and declining margin financing, while noting that there are no clear signs of meaningful near-term policy support to strengthen underlying economic growth."Our downgrade reflects our belief that there are limited catalysts that can drive a sustained re-rating," the report said.Despite the downgrade, HSBC continues to see opportunities in select Chinese sectors. Its preferences include banks, consumer stocks offering attractive bond yields, biotechnology and technology hardware companies expected to benefit from the rollout of artificial intelligence.(Disclaimer: Recommendations and views on the stock market and other asset classes given by experts are their own. These opinions do not represent the views of The Times of India)You use AI every day. Now get your AI Quotient. Take the AIQ test.