Notwithstanding geopolitical turbulence and trade tariff war, HSBC Global Investment Research expects bellwether Senex to hit 96,000 points by the end of next year on the back of government-initiated reforms playing out.
Though foreign funds have withdrawn significant amounts from India in the last 12 months, a period in which the market has seriously underperformed, local investors have remained resilient, said the report.
While earnings growth expectations can fall a little further, valuations are no longer a concern, government policy is becoming a positive factor for equities and most foreign funds are lightly positioned, it said.
“We think Indian equities now look attractive on a regional basis and upgrade the market to overweight (from neutral). As in China, US tariffs will have little impact on the profits of most listed companies,” said the report.
India is a quiet corner in the Asia equity universe. Foreign investors have taken out $15 billion from this market since the beginning of the year. The Indian market has underperformed during this period and that might be about to change, it said.
Key challenges
A key reason for this underperformance is a slowdown in earnings while valuations remained elevated. Consumption and investment trends are weak and in response, the administration is focused on boosting consumption and the central bank is easing.
Together with moderate inflation, this can support domestic demand and earnings, said the report.
While growth can help boost consumption in the near term, for a more sustainable pick-up, wages and private capex will have to improve.
Another issue that hangs over Indian earnings is the 50 per cent US tariff on imports from India. Indeed, India faces some of the highest US tariff rates in the world, but most listed equities are domestic in nature and less than 4 per cent of sales for all BSE-500 companies come via exports of goods to the US. When it comes to earnings growth, the direct impact from tariffs is muted. “The growth recovery is likely to be gradual, but we think the risks are reflected in valuations. 2025 consensus forecasts for earnings growth have come down – they are now at 12 per cent and we expect this to drop to 8-9 per cent. For the next year, estimates of 15 per cent might appear high and much will depend on how effective the policies will be in reviving growth,” said the report.