After two years of underperformance, HSBC turns overweight on India; downgrades China

Global banking major HSBC has upgraded Indian equities to 'Overweight' from 'Neutral', citing a multi-year valuation correction, resilient corporate earnings and strong domestic credit growth, as it turns more positive on the Indian market after nearly two years of underperformance against broader Asian and emerging markets.

At the same time, HSBC has downgraded mainland Chinese equities to 'Neutral' from 'Overweight', arguing that weak domestic demand, continued stress in the property market and a lack of fresh policy catalysts could limit the scope for a sustained recovery in Chinese stocks.

In its Asia equity strategy report dated November 9, HSBC said India's investment case had become "quite compelling relative to other markets". The bank believes the combination of more reasonable valuations and stable earnings growth makes Indian equities a relatively attractive diversification option at a time when several Asian markets remain heavily influenced by the artificial intelligence (AI) investment cycle.

The shift represents a change in HSBC's relative allocation towards the two major Asian markets. An 'Overweight' rating indicates a preference for holding a larger allocation to a market compared with its benchmark, while 'Neutral' suggests keeping exposure broadly in line with the benchmark.

Valuation correction brings large-caps back into focus

Indian equities have underperformed broader Asia over the past two years, partly due to elevated valuations, high crude oil prices, global macroeconomic uncertainty and investor preference for AI-linked markets such as Taiwan and South Korea.

HSBC believes much of this underperformance is now reflected in market prices. The FTSE India index is trading at around 19 times forward earnings, broadly in line with its long-term average. While India remains the most expensive equity market in the region, its valuation premium over regional peers has narrowed.

Large-cap stocks, in particular, have undergone a significant de-rating and appear less stretched relative to their historical valuations. HSBC also pointed out that valuations have eased across private banks, IT services, real estate and consumer staples, although it cautioned that some of this correction reflects slower growth and competitive pressures.

The bank also highlighted relatively low institutional positioning in Indian equities. Only 22% of global emerging market (GEM) funds are overweight India, it said, suggesting there is room for allocations to improve if earnings and macroeconomic conditions remain supportive.

Credit growth, earnings provide support

HSBC's upgrade is also underpinned by the resilience of domestic economic activity despite higher interest rates and energy costs. The report cited bank credit growth of 21% year-on-year in October, with corporate lending increasing around 24% and credit to micro, small and medium enterprises (MSMEs) rising 25%. Deposit growth also accelerated to more than 17%.

The latest publicly available RBI data, however, showed overall bank credit growth of 17.94% and deposit growth of 16.60% as of October 15. HSBC's October figures refer to a later reporting period.

The bank also pointed to improving corporate earnings momentum. Earnings growth in India has recovered from high single digits last year to low double digits over the past four quarters. Market consensus currently estimates aggregate earnings growth of 14% in FY27 and 16% in FY28.

HSBC, however, considers these estimates somewhat optimistic and expects modest downward revisions in the coming months due to softer growth and margin pressures, although it does not expect the cuts to be significant.

HSBC expects some downward revisions in estimates over the coming months due to softer growth and margin pressures, but believes these are unlikely to be significant. It described the earnings backdrop as offering greater visibility and stability.

Government spending is another source of support. By August, the Centre had utilised around 42% of its FY27 capital expenditure budget, compared with 38% during the corresponding period last year, helping sustain domestic investment and demand.

Banks, industrials among preferred sectors

Within India, HSBC favours financials, industrials, consumer discretionary companies, real estate and hospitals. It sees opportunities in banks on the back of stronger lending growth and improving earnings, while capital goods, cement, ports and electronic manufacturing services could benefit from investment in infrastructure, manufacturing and data centres.

In consumption, the bank prefers retailers and automobile companies over consumer staples, citing relatively stronger demand and growth prospects. It also sees opportunities in insurers and hospitals.

However, it remains cautious on IT, consumer staples, oil and gas, utilities and pharmaceuticals.

Oil prices, rural demand remain key risks

HSBC cautioned that the outlook is not without risks. Persistently high crude oil prices could weigh on corporate margins, domestic consumption and the rupee. It also flagged the possibility of an El Niño-related impact on agricultural output and rural demand.

The report noted that 44% of India's districts had received deficient monsoon rainfall, while reservoir levels were 34% below full capacity. These conditions could affect winter crop yields and add to food inflation.

Retail inflation had already climbed to 5.54% in September, a 23-month high. HSBC's economists expect economic growth to soften somewhat in the coming months and anticipate another 50-basis-point increase in the RBI's repo rate in December, following the 25-basis-point hike in October.

Despite these risks, HSBC believes the valuation correction, domestic demand and earnings resilience provide sufficient support for a more favourable outlook on Indian equities.