HSBC Downgrades India to ‘Underweight’ on Inflationary Pressure from Elevated Oil Prices

MUMBAI: HSBC downgraded India from neutral to underweight – its second in the last two months – as inflationary pressures, elevated oil prices and demand pressures could weigh on income growth.

“The ongoing West Asian conflict has refocused downside growth risks, given India’s significant reliance on imported energy,” the brokerage said in a client note. “The last two quarters have seen signs of improvement in growth, but we think the recovery will be delayed from here.”

HSBC cut India to neutral in late March, citing less attractive risk-reward.

A selloff in March eased valuation concerns, but expected pressure on corporate profitability could undo the gains.

“Valuations have fallen materially from their peaks, but will rise again as earnings cut,” the brokerage said. “Without the expected cyclical acceleration in growth, valuations are likely to remain a constraint.” It is most bullish on China, Hong Kong and Singapore, while upgrading South Korea to neutral from underweight. Apart from India, Indonesia and Thailand are among its least preferred markets.

HSBC sees opportunities in the country’s private banks, base metals and select healthcare companies, but the relative case for Indian equities has weakened as “headwinds have weakened India’s position against the rest of the sector”.