HSBC downgrades Indian markets to 'neutral,' shifts focus to China and Hong Kong

Global brokerage firm HSBC has downgraded Indian equity markets to a "neutral" stance from its earlier "overweight" position, citing slowing growth and elevated valuations. The firm has also revised its 2025-end Sensex target, lowering it by 5,000 points to 85,990.

While India’s long-term growth narrative remains intact, HSBC has shifted its optimism toward China and Hong Kong markets.

Slower growth dims optimism for India

HSBC noted that India’s robust annualized profit growth of 25 pe rcent in recent years has softened significantly. This slowdown, combined with high valuations—currently at twenty-three times forward earnings—has capped upside potential. While India continues to present a strong medium-term structural growth story, near-term challenges such as weaker-than-expected earnings and growth deceleration have raised concerns.

Key sectors like banking and IT are feeling the pinch. Banks, which constitute the largest weight in the listed universe, are grappling with narrowing margins and muted loan growth. Similarly, the IT sector is facing a tepid recovery in global demand, particularly in Europe, leading to a lacklustre performance. Urban consumer demand has also weakened, further weighing on the market sentiment.

Bright spots amid challenges

Despite the downgrade, HSBC acknowledged that India remains one of the strongest emerging market stories. The brokerage suggested that rural demand could witness a rebound in the coming months, providing a glimmer of hope for broader economic recovery. However, it noted that this may not significantly impact the equity markets due to the limited exposure of rural sectors in listed companies.

Focus shifts to China and Hong Kong

In contrast to its outlook for India, HSBC upgraded China and Hong Kong to "overweight," citing better prospects for growth and more attractive valuations. South Korea also saw an upgrade to "neutral" from "underweight." These changes indicate a shift in HSBC's emerging market strategy, with a preference for regions offering better risk-reward dynamics in the short to medium term.

Investors to recalibrate strategies

With HSBC’s recalibration, Indian markets could see some realignment of foreign institutional investments. While the downgrade may temper expectations, it reflects the need for markets to address valuation concerns and reignite growth momentum to maintain their appeal on the global stage.