Indian equities are becoming more attractive as valuations moderate, but rising oil prices, higher bond yields and slowing earnings momentum could limit the market's upside, according to HSBC analysts Herald van der Linder, Prerna Garg and Adam Qi.
In their India strategy report, the analysts said financials offer the most attractive risk-reward following the recent market correction, while industrials also present growth opportunities.
HSBC expects India Inc's earnings to grow 11-12% year-on-year (YoY) in FY27, below consensus expectations, and anticipates modest downward revisions as growth loses momentum in the second half.
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HSBC: India Valuations Become More Attractive
HSBC said India is back on investors' radar as valuations have become more reasonable and global investors show greater willingness to look beyond artificial intelligence-led investment themes.
The Nifty 50 is trading at 16 times forward price-to-earnings, a level reached only twice in the past decade, according to the brokerage. Mid-cap valuations have also become less stretched.
Valuation premiums have eased across financials, IT services, real estate and consumer staples, although HSBC cautioned that some of the de-rating reflects weaker growth prospects.
The analysts believe the market reset has improved the risk-reward profile of financial stocks, making the sector their preferred investment choice.
Earnings Growth May Slow In Second Half Of FY27
HSBC expects earnings growth to lose some momentum in the second half of FY27 after recovering over the past year.
HSBC India Strategy
Less supportive base effects, elevated input costs and rising inflation could weigh on demand, particularly in rural areas. While consensus forecasts continue to assume mid-teens earnings growth in the second half, HSBC considers these expectations slightly optimistic.
The brokerage forecasts FY27 earnings growth of 11–12% YoY and expects modest downward revisions to market estimates.
Higher Oil Prices, Bond Yields May Keep Foreign Investors Cautious
Despite improving valuations, HSBC said elevated oil prices and rising bond yields remain key risks for Indian equities.
Relatively modest earnings growth could leave the market more vulnerable to higher energy costs and rising yields, potentially limiting foreign investor enthusiasm. Lower oil prices and bond yields would provide meaningful support to the market, the analysts said.
HSBC's forex strategist also sees some near-term support for the rupee, supported by healthy foreign exchange reserves and measures taken by the Reserve Bank of India.
Meanwhile, initial public offerings and other new share issuances have diverted liquidity from the secondary market. HSBC expects this drag to ease from early 2027.
HSBC's Preferred Sectors: Financials, Industrials
Within financials, HSBC favours private sector banks and diversified non-bank financial companies (NBFCs). The brokerage also sees opportunities in industrials, particularly capital goods, defence, ports, electronic manufacturing services and renewable energy.
In metals, it prefers aluminium. Within consumer stocks, HSBC remains selective, favouring specific retailers and automobile companies over consumer staples.
The sector preferences reflect the brokerage's focus on growth opportunities amid a more measured earnings outlook.
El Niño Raises Risks For Rural-Facing Sectors
HSBC flagged the potential impact of intensifying El Niño conditions on food prices and rural demand. India's consumer price index food inflation accelerated to 7.7% in September, according to the report, and could rise further as El Niño intensifies.
While the broader equity market has historically shown limited sensitivity to El Niño, the impact could be more pronounced for rural-facing sectors such as fast-moving consumer goods, tractors and agrochemicals.
A weakening rural economy could also increase credit costs for lenders with major exposure to these areas, HSBC cautioned.
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