HSBC upgrades India rating to ‘neutral’ as hype gone

The Dollar Business Bureau

Global financial services company HSBC has upgraded Indian equities to ‘neutral’ from ‘underweight’. The hype is almost gone and the country’s valuation premium to Asia has come down, which is approaching an average premium for a decade, it said.

High-frequency indicators show that the environment for earning would improve. The earnings expectations are very much optimistic according to HSBC. High valuations and increasing commodity prices have led to the underperformance of Indian market. This can help only commodity exporters rather than importers, it said.

Announcing the ratings for various sectors, HSBC upgraded IT to ‘overweight’ due to the realistic earnings and reasonable valuations. It has upgraded capital goods and engineering industries to ‘neutral’ as they are still in the phase of recovery.

The global brokerage firm has downgraded healthcare also to ‘neutral’ on high expectations of earnings and good valuations. In its sectoral outlook, FMCG and utilities remained as ‘overweight’, and financials, materials and telecom as ‘underweight’. It has graded ‘neutral’ for energy and consumer discretionary.

HSBC said that India's underperformance related to its Asian partners would end in near future. It has further raised the target for Sensex to 26,000 in 2016 from the current 25,000. This is based on 16 times the estimated earnings for the year 2017.

Indian economic growth would improve in the next half of 2016. Better liquidity conditions and normal monsoons in the country would also boost the sentiments, the brokerage company predicted.

The corporate earnings growth forecast of 17.5% for 2016 is likely to be optimistic. A moderate growth of 9-10% is realistic as the downside risk to these estimates, is mostly in consumer discretionary and materials, HSBC said.