HSBC flags 5 positives, 4 risks for Indian equities amid market uncertainty

Indian equities have trailed their EM peers by over 24 percentage points since mid-September 2024, primarily because of earnings weakness

Equity benchmarks face a key test as investors weigh consumption revival hopes against tariff pressures and weak earnings. Amidst this, HSBC has outlined tailwinds and risks that could cap gains.

 

The global brokerage listed five positive cues that could lift markets, while flagging four risks. It maintained a ‘Neutral’ rating on India in a regional context, according to a recent note.

 

Indian equities have trailed their emerging market peers by over 24 percentage points since mid-September 2024, primarily because of earnings weakness, HSBC said. Tepid demand, along with rising competition, has put growth under pressure, with earnings estimates seeing sharp downgrades, triggering a sell-off by global investors.

 

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From fiscal and monetary stimulus to muted impact from US tariffs, HSBC listed the factors that are now supportive of the domestic stock market. 

 

However, it flagged risks such as rising sectoral competition, equity oversupply from new issuances, and subdued private capex. While tax cuts may aid near-term consumption, sustained revival will depend on stronger investments and wage growth, failing which 2026 growth estimates could face downgrades, HSBC said.  CATCH STOCK MARKET LATEST UPDATES LIVE TODAY

What could move stock markets higher?

1) India and China equities could gain in tandem

Indian and Chinese equities are often seen as counterweights, with the belief that foreign investors fund a rally in one market by selling the other. However, HSBC argues this view is not always valid.

 

The recent rally in China has been driven mainly by domestic investors, with limited participation from foreign institutions. In India, too, domestic investors continue to play a strong role. HSBC said that Indian equities can perform well even if Chinese equities rally.

2) Tariffs won't derail the market

India faces some of the highest US tariff rates in the world. However, listed corporates are largely domestic in nature, and less than 4 per cent of sales for all BSE500 companies come via exports of goods to the US. In addition, pharma is the sector most dependent on the US and is, at the moment, excluded from tariffs. Hence, the impact of tariffs on earnings will be muted. 

3) Valuations are not as demanding

Indian valuations have eased compared to history and Asian peers, reducing headwinds, according to HSBC. However, limited earnings growth may cap re-rating potential, keeping upside in check, and strong local demand should prevent multiples from falling to EM averages. Valuations remain elevated in staples and select industrials, but look attractive in tech and banks.

4) Consumption remains weak, but outlook improves

Rural demand is showing signs of recovery after a good monsoon and easing inflation, while urban demand has softened due to weak wage growth and slower credit, HSBC said. Recent tax cuts may provide short-term support, but sustained revival depends on stronger wage growth. The Eighth Pay Commission, expected by mid-2027, could lift senior executive officer salaries and pensions by about 15 per cent. 

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5) Monetary easing yet to show impact

Inflation has fallen to an eight-year low of 1.6 per cent, enabling rate cuts and easier lending norms. Liquidity has improved, but weak demand and rising credit costs kept banks’ earnings muted. Lower rates are expected to eventually spur investment, consumption, and wage growth, according to HSBC. 

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