New Delhi

HSBC has upgraded Indian equities to overweight from neutral, citing resilient corporate earnings, improving credit growth and more reasonable valuations following a prolonged market correction, while downgrading China to neutral from overweight amid a lack of catalysts for a sustained market re-rating.

The upgrade reflects India’s relative attractiveness after a multi-year valuation reset and significant underperformance against emerging markets, HSBC’s Asia-Pacific equity strategy team said in a report authored by Herald van der Linde, the brokerage’s Head of Equity Strategy for Asia Pacific. The brokerage expects India’s earnings momentum to improve, with the pace of corporate earnings downgrades moderating.

Large-cap valuations, in particular, have become more reasonable, while strong credit growth and policy measures supporting economic growth and the rupee provide additional support. HSBC acknowledged that sustained high energy prices could trigger modest earnings downgrades in the coming quarters. However, it expects these revisions to remain insufficient to materially undermine overall investor sentiment. The brokerage also highlighted India’s diversification appeal, particularly as Asian equity markets become increasingly dominated by artificial intelligence-linked stocks. Only 22 per cent of global emerging-market funds are currently overweight India, suggesting scope for positioning to improve, it said.

On sectoral preferences, HSBC favours banks, citing an improved growth outlook, and sees opportunities in industrials, particularly capital goods, cement, ports and electronic manufacturing services.

Within consumption, the brokerage prefers discretionary stocks over staples, with retailers and automobile manufacturers among its preferred segments. It also sees growth opportunities in insurers and hospitals, notwithstanding recent regulatory uncertainty.

However, risks remain. While government measures have helped cushion the impact of the energy shock, a prolonged period of elevated oil prices could weigh on domestic demand and put pressure on the rupee. Inflation could also constrain consumption, particularly in rural areas, HSBC said. The brokerage also flagged El Niño as a potential macroeconomic risk.

HSBC downgraded Chinese equities to neutral from overweight, despite relatively low valuations, high shareholder yields and recent policy measures aimed at stabilising capital markets.

The downgrade reflects concerns that these measures may provide a downside cushion but are unlikely to generate the catalysts needed for a sustained re-rating of Chinese equities.

Weak consumer confidence, continued stress in the property market and subdued domestic investment remain constraints on economic growth. Investor appetite has also weakened, as reflected in subdued southbound capital flows and declining margin financing, the report said.

HSBC also sees limited evidence of meaningful near-term policy support capable of driving a fundamental improvement in economic growth.