In less than a month, HSBC Securities has downgraded Indian equities for the second time. This was triggered by the market’s less attractive risk-reward due to concerns caused by the West Asia crisis such as a likely shoot up in energy prices and hit on earnings growth. The brokerage now has an an ‘underweight’ view compared to its ‘neutral’ stance earlier.
On March 31, the brokerage firm had trimmed its view from ‘overweight’. HSBC is among the key brokerages that have trimmed their expectations on Indian equities in the recent past, along with UBS Global Wealth Management, Goldman Sachs, and Nomura.
Thailand and Indonesia are the other Asian countries that HSBC has an ‘underweight’ view on. On the other hand, it has an ‘overweight’ stance on Mainland China, Hong Kong, and Singapore and a ‘neutral’ view on five others – Japan, South Korea, Malaysia, Philippines, and Taiwan.
Currently, crude oil is hovering around the $-100 per-barrel mark, a crucial level, above which if sustained, can put further pressure on inflation, economic growth, corporate earnings, and market returns.
Globally, India is among the worst-performing markets and looks less attractive than its North Asian peers, the brokerage firm said. Despite the sharp correction in equities due to the aggravated tension in West Asia, HSBC believes that India may appear expensive again as earnings downgrades filter through.
The benchmark Nifty 50 is currently down nearly 4% from the end of February when the tension between the US and Iran worsened and foreign investors have offloaded shares worth around ₹1.6 lakh crore during this period. The index is also down over 8% from the record high hit in early January.
“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,” HSBC wrote in its report.
While domestic investors supported the market even during the war-led volatility through systematic investment plans, the meltdown in the secondary market was reflected in the primary space too. A renewed pick up in foreign demand will be required for the initial public offering activity to see some strength, HSBC said.
The broking firm believes that a renewed rise in inflation could undermine the gradual recovery in demand. It will also likely contribute to higher non-performing loans across the lending sector and create downside risks to 2026 earnings. Historically, a 20% rise in crude oil prices has been associated with a 1.5-percentage-point compression in earnings, it added.
