HSBC has downgraded its rating on Indian equities to "neutral" from "overweight," citing a combination of factors that point to a more cautious outlook for the markets. The downgrade comes amid a softening of corporate profits, elevated valuations, and an overall muted return outlook for 2025. HSBC noted that India has experienced annual profit growth of around 25% in recent years, which it views as unsustainable going forward.
In its revised market outlook, HSBC highlighted that while India’s economic growth remains robust, the country's earnings multiples are high, leading to a potential recalibration of earnings expectations. This is expected to limit market returns, with the brokerage cutting its FY25 earnings growth forecast for the Nifty 50 from 15% to just 5%. As a result, HSBC has also reduced its Sensex target for 2025 by 5,000 points, bringing it down to 85,990.
HSBC pointed out that key sectors are facing headwinds, including banks, which are experiencing margin pressures and slow growth, and the IT sector, which is underperforming due to a slow recovery in overseas demand, particularly from Europe. Despite these challenges, the brokerage remains optimistic about India’s structural growth story. The country benefits from a young demographic, expanding consumer markets, and ongoing investments in both physical and digital infrastructure. Additionally, India’s growing share in global trade and its record-high foreign exchange reserves offer stability against currency volatility.
Overall, while HSBC maintains its view that India is one of the strongest growth stories among emerging markets, it cautioned that the combination of a cyclical growth slowdown and high valuations limits near-term upside. Investors are expected to reassess their positions, potentially leading to muted returns in 2025.
