Global investment bank HSBC has downgraded the Indian market from ‘overweight’ to ‘underweight’, citing lower earnings growth and lack of room for further interest rate easing. The downgrade, the first by a major brokerage in a year, raises concern on the negative impact of adverse weather on the rural economy.
“Last year, Prime Minister Modi’s victory set the stage for a significant amount of reform optimism and encouraged portfolio inflows. Indian equities rallied and with lack of momentum in other markets, both global and regional mutual funds built historically high overweight positions in this market by the end of 2014. This continues to be the case. We now challenge this position and recommend investors to underweight India (from our prior overweight position),” HBSC analysts Devendra Joshi and Herald van der Linde said on Wednesday, in a report titled ‘India: Gravity sets in’.
The Indian market had rallied 30 per cent on the back of portfolio investments of $20 billion from foreign investors in 2014. HSBC says, “India remains a market where investors have high portfolio exposure…but risk to growth is rising.”
The brokerage says there are no signs yet of any recovery in India’s capital expenditure cycle and lower earnings estimates have raised India’s valuations. It also states that China’s policy stimulus will lead to an increase in commodity prices, a negative for India.
HSBC says Indian equities are on a weak footing as there won’t be any interest rate cuts by the Reserve Bank of India until June. “In addition, the next rate cut might not have the same impact on equities as the first (unexpected) cut some months ago.”
HSBC has upgraded Philippines to ‘overweight’ and Hong Kong to ‘neutral’. It maintains an ‘overweight’ label on China and Singapore.