HSBC has downgraded Indian equities to ‘underweight’ from ‘neutral’, citing rising risks to earnings from higher inflation, elevated energy prices, and a potential slowdown in domestic demand.
In a note issued on Thursday, the brokerage said India’s reliance on imported energy, and the resulting risks to inflation and domestic demand, have cast doubts on the durability of the ongoing earnings recovery.
“We expect consensus forecasts to be revised down in the coming months from current expectations of 16 per cent y-o-y for (calendar) 2026. While valuations have corrected materially from their peak, they will appear elevated as earning downgrades feed through. India looks less attractive than its North East Asian peers in the current macro environment,” wrote Herald van der Linde, Head of Equity Strategy – Asia Pacific, HSBC.
The brokerage has upgraded South Korea from ‘underweight’ to ‘neutral’, terming it a “compelling growth story.”
The brokerage also flagged the risk of a renewed uptick in inflation, especially if fuel prices are adjusted upwards after state elections. Higher inflation could dampen consumption demand and increase stress in the financial system through rising non-performing loans, it said.
Foreign investor sentiment towards India remains cautious amid rupee weakness, the report said.
“Sharp FX depreciation has weighed on returns, and as per our forex strategist, the INR is exposed to depreciation pressure if oil prices stay high. In addition, investors are increasingly focused on the potential implications of AI, particularly for software services. Together, these factors are likely to constrain foreign inflows,” said van der Linde.
While resilient domestic flows — particularly through systematic investment plans (SIPs) — is a positive, HSBC believes foreign demand has to return if IPO activity is to revive.
HSBC, however, said selective opportunities remain in India, particularly in private sector banks, base metals, and parts of the healthcare space, even as broader market headwinds intensify.
How they stack up
Overweight: Mainland China, Hong Kong, Singapore
Neutral: South Korea (from underweight), Japan, Malaysia, Philippines, Taiwan
Underweight: India (from neutral), Indonesia, Thailand