Along with the upgrade, HSBC has also revised its year-end target on the Sensex to 84,000 from 80,500 earlier, implying an upside potential of 8.3% from current levels.
In its latest note on Thursday, July 16, HSBC said that lower energy prices and resilience in consumption have lowered the earnings risk.
Crude oil prices may have rebounded from $70 a barrel to $85 a barrel, but are still well below the Iran war peak of $125 a barrel. The resilience in consumption is evident from the strong business updates reported by all FMCG companies, including Dabur, Marico, Nykaa, auto sales numbers reported for June, and even jewelers like Titan and Kalyan.
The recovery also prompted the Foreign Institutional Investors to nibble into Indian equities, but HSBC is concerned about the sustainability of these flows, as the attention shifts back to AI-linked opportunities.
The brokerage justifies this by saying that India’s growth is relatively modest and valuations are still not undemanding compared to peers and therefore India will need steadier external flows for the markets to outperform its other EM peers.
“A pick-up in IPO activity in the second half of the year will boost supply, but domestic demand is set to remain resilient,” HSBC wrote in its note.
Another risk that HSBC has flagged in its note is the rural demand impact, particularly if El Nino strengthens. “History tells us that this can have sector-specific effects, but the sensitivity of the broader equity market to El Nino is low,” the note added.
Herald Van De Linde of HSBC write further that the market may generally look through the first quarter results as they would reflect the earlier spike in energy prices and some inventory-related drags. He goes on to warn of further earnings downgrades to low double-digits, with consensus having already cut them down from 18% to 15% (ex-commodities).
“A key risk to our view is that if the latest flare-up in West Asia drags on, it can reignite concerns about energy supply disruptions and push energy prices higher again,” he wrote.
What Is HSBC Betting On In India?
HSBC has a preference for financials, particularly private banks after their continued underperformance as growth risks have come down.
The brokerage also likes commodities and select industrials, prefers consumer discretionary over staples as the latter looks more stretched on valuations and are more exposed to rural demand and rising food inflation.
It also bets on real estate as a high beta sector as demand as held up and valuations are now more attractive but expects the IT sector to stay out of favour due to AI-related concerns even after a meaningful de-rating.
