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Informist, Friday, Sept. 26, 2025

MUMBAI – HSBC Global Investment Research expects the Indian stock market to "return to form" after its recent underperformance. With lower valuations, a slow recovery in earnings, and low positioning by foreign funds, the brokerage is positive on the domestic equity market, it said in a report Friday. It expects foreign funds to return to India after an absence of 12 months amid crowded regional markets, a weak dollar, and resumption of interest rate cuts by the US Federal Reserve.

"While Indian equities have underperformed emerging markets by 32ppt (percentage points) since mid-September 2024, the worst performance since 2001, we now find the market attractive," the brokerage said in the report. "Valuations have fallen--the premium to the region is back at historical levels--while lower inflation and easing measures should support growth." It also noted that corporate earnings are bottoming out and set to improve.

Despite the weak dollar and the resumption of rate cuts by the Fed, rotation into emerging markets has not happened yet, HSBC said. Once this takes place, the brokerage expects the Indian stock market to be an "outsized beneficiary". While US tariffs are likely to have limited impact on earnings, any positive trade developments could trigger flows from investors sitting on the sidelines, it said.

SECTOR VIEWS

While structural issues persist, the recent demand-side measures, including reduction in income tax, goods and services tax, and the repo rate, are seen as positives for the consumer segment, HSBC said. It expects incremental benefits of around INR 2.00 trillion to INR 2.50 trillion for customers owing to these cuts. Moreover, the margins for the sector are close to bottom and the Street expects a recovery for consumer staples companies in the second half of the financial year 2025–26 (Apr-Mar).

Automobile sales are also expected to benefit from these demand-side measures, HSBC said. The price cuts of 3-9% across categories following the reduction in GST rates is expected to revitalise growth, especially in the entry-level passenger vehicle segment and across all segments of two-wheelers. The GST cut is also expected to boost the current premiumisation drive while attracting first-time buyers, the brokerage noted. 

Amidst loan growth pressure, net interest margin compression, and an asset quality scare, the brokerage prefers large banks and non-banking finance companies in the financial sector. Net interest margins are expected to bottom out in the second half of FY26, it said, adding that asset quality trends are stabilising. It expects this to drive higher earnings growth between FY26 and FY28 compared with the muted trends estimated from FY25 to FY26.

Among insurance companies, the brokerage prefers multi-line non-life insurers with a low impact due to the change in GST, followed by health and life insurers. "While the exemption in GST rates would be beneficial from an overall growth perspective over the medium term, insurers could see a hit to VNB (value of new business) margins or combined ratios in the near term due to absorption of the Input Tax Credit cost," HSBC said. Meanwhile, it has a cautious stance on asset management companies due to market volatility and an uncertain macroeconomic environment. "Asset management companies should see a structural growth benefit, and their valuations are also near their peak," the brokerage said.

When it comes to information technology services, the brokerage holds a positive view as valuations are believed to have limited downside risk and demand is likely to pick up next year. HSBC expects a restart of transformational and discretionary projects in FY27 following the muted demand seen over the past three years and recent strong results reported by US companies. With this, it estimates a 5-7% increase in IT spending in FY27 along with easing pressure on margins. Further, the brokerage expects only limited impact on the sector due to an increase in insourcing or global capability centres.

Though the US tariffs are seen as an overhang for the pharmaceutical sector, the brokerage sees low risk given the high dependency of the US on Indian generics. The brokerage also maintains a positive growth outlook for hospitals, given an ageing population, an increase in lifestyle-related disorders, and rising health insurance coverage.  End

Reported by Arya S. Biju

Edited by Rajeev Pai

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