What's Holding Back Indian Stock Market? HSBC Research Lists Key Challenges

HSBC Global Investment Research remained 'Neutral' on India, as it expects upsides to be capped. After assessing the risk framework, the investment firm found five out of nine risk factors are improving; however, some issues remain which will cap Indian markets' upsides.

Indian equities have underperformed compared to other emerging markets by 24% since mid-September 2024, as weak earnings dampened sentiments. Tepid demand coupled with rising competition pressured growth of corporates, according to HSBC Global Investment Research.

Earnings growth has grown in single digits for the last five quarters compared to stellar growth in the last few years. The consensus estimate of earnings growth is 11% for calendar year 2025, the brokerage said.

However, earnings growth is still facing the risk of downgrades. Hence, HSBC sees earnings growth settling down at 8–9% for the period. The trajectory for the calendar year depends on the impact of policy support.

Banks are facing weak demand and high credit costs. Technology firms are facing a global slowdown. As an exception, consumer companies are doing good business in rural markets despite facing hurdles in urban areas, HSBC said.

Another primary reason for underperformance is foreign investors pulling money out of domestic equities. Foreign investors have trimmed holdings of Indian equities for 11 months out of 12 months, the brokerage said.

Oversupply to Indian equity markets is a threat to their performance. Promoters are offloading their stakes in the primary markets via offers for sale in recent months. In case supply from their side exceeds demand from investors, it will create risks.

However, HSBC Global Investment Research has noted that domestic investors have proven to be more resilient compared to expectations. In July, mutual funds recorded the highest inflows through systematic investment plans.

"This is the strongest supportive factor for Indian markets and can be a powerful force even when foreign inflows are muted," the brokerage said.

HSBC believes that tariffs will not derail markets. Less than 4% of BSE 500 companies get their revenue via exports to the US. The pharma sector is the most dependent in the US, which is excluded from tariffs. Hence, the tariff impact on earnings is muted.

In contrast to common opinion, HSBC Global Investment Research believes that India can outperform despite a rally in Chinese markets. The reason is domestic investors drive rallies in both markets. Moreover, US investors, who account for 40% of assets under management in India, showed very little appetite to go back to China.