Multinational brokerage HSBC has downgraded Indian stocks to 'Underweight' from 'Neutral' as it expects potential inflation and demand pressures to take a toll on corporate earnings growth this year. In March, the firm had downgraded India to 'neutral' citing less attractive risk/reward.
"The ongoing Middle East conflict has refocused attention on downside growth risks, given India's significant reliance on imported energy. Growth has showed signs of improvement in the last two quarters, but we think the recovery from hereon will be delayed," analysts led by Herald van der Linde said in a note.
The government has so far shielded consumers from higher global oil prices due to the US-Iran war. Retail petrol and diesel prices can rise likely in early May after state elections conclude. A renewed rise in inflation could undermine the gradual recovery in demand and contribute to higher non-performing loans across the lending sector, creating downside risks to 2026 earnings, they said.
Historically, a 20% increase in crude prices has been associated with around 1.5 percentage point earnings compression. Consensus growth estimates in the coming months could be reduced from the current 16% y-o-y for FY27, HSBC said.
"Valuations have fallen materially from their peak, but they will rise again as earnings cuts come through. Without the anticipated cyclical acceleration in growth, valuations are likely to remain a constraint," the note said.
Sharp rupee depreciation has weighed on returns for foreign investors who are also concerned about the potential implications of artificial intelligence, particularly for software services.
Korea Vs India
HSBC said Indian equities are now "less attractive" than its North East Asian peers like South Korea in the current macro environment.
The brokerage has upgraded Korea to 'neutral' from 'underweight' as heavy foreign positions have unwound and some crowded trades have eased. Moreover, supportive domestic flows and strong earnings led by AI-driven demand underpin the outlook.
Korea's benchmark Kospi index has surged 51% year-to-date, compared to a 6.7% decline in India's blue-chip Nifty 50 index.
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