Mumbai: With the valuation premium of Indian equity markets over their Asian peers shrinking during the last few months, global brokerage house HSBC has upgraded Indian equities to ‘neutral’ stating that ‘green shoots’ are emerging with demand for cement, long consumption steel and power showing signs of improvement. HSBC has raised its year-end Sensex target to 26,000 from its earlier estimate of 25,000.
“Although ‘green shoots’ are emerging, there remains some moderate downside risk to earnings. We now expect Indian equities to move in line with the rest of Asia. As such, we upgrade India to neutral in a regional portfolio,” said Devendra Joshi, equity strategist, Asia-Pacific, HSBC.
Global investors use credit ratings assigned by organisations like Moody’s to make their investment decisions. A neutral outlook means Indian equity markets are not overpriced or underpriced.
HSBC had an underweight outlook since April 2015 as the Indian equities were selling at a premium in expectation of Prime Minister Narendra Modi’s reforms agenda.
With investors expressing concern over the slow pace of reforms, the Indian equities have lost their premium and are now in line with other Asian markets.
India has underperformed MSCI Asia ex-Japan by 2.5 per cent till date in 2016.
This, according to HSBC, was because valuations were high, rising crude oil and commodity prices helped commodity exporters more than commodity importers, and mutual funds portfolio positions were already significantly overweight at the start of the year.
“By the end of last year, the markets were pricing in diminished prospects of reform under the Narendra Modi government, the key reason for us being underweight since April 2015. We believe this underperformance will now come to an end,” HSBC said in its India strategy report.
According to it, India’s valuation premium to Asia has declined and is now approaching a 10-year average premium. While domestic liquidity has improved due to several measures announced by the central bank, HSBC pointed out that investor holdings have also come down, which is positive for the markets.
The brokerage has upgraded IT sector to ‘overweight’ given its realistic earnings expectation and reasonable valuations. “We downgrade healthcare sector to neutral on high earnings expectations and rich valuations. We remain overweight on consumer staples and utilities, neutral on energy and consumer discretionary and underweight on financials (we prefer private banks),” the brokerage said.
