Growth Concerns, High Valuations: Why HSBC Has Revised Its Outlook On Indian Equities To 'Neutral'

HSBC has lowered its outlook on Indian stocks, shifting to a 'neutral' rating due to concerns over slowing growth and high valuations that limit potential upside. The brokerage cut its target for the BSE Sensex for the end of 2025 by 5%, now expecting it to reach 85,990, which suggests just a 10% gain from the current level of 77,700.

Urban demand lags

The report highlights a slowdown in cyclical growth and notes that elevated valuations have capped any notable growth in the near term. While rural demand is showing some recovery, urban consumption remains sluggish, especially in the technology sector, which continues to face weak overseas demand.

HSBC’s move follows similar downgrades by other global brokerages. Last year, both Goldman Sachs and Bernstein Quants lowered their outlook on Indian stocks, citing a slowdown in economic and corporate activity. However, some firms, such as Citi and Morgan Stanley, remain optimistic, predicting strong returns for Indian equities. Additionally, Motilal Oswal forecasts solid corporate earnings growth in FY26.

Foreign funds exit market

India's growth forecast for FY25 stands at 6.4%, the weakest in four years, driven by a weaker manufacturing sector and slower corporate investments. After hitting record highs until September last year, the Sensex and Nifty 50 indices have pulled back, with foreign investors exiting expensive stocks. The indices are now trading around 10% lower than their peak.

The banking sector, which has the largest weight in India’s listed stocks, is also struggling, partly due to stricter central bank policies that have slowed credit demand. Despite these challenges, HSBC noted that Indian equities remain relatively shielded from global risks and could benefit from any changes in trade policy under a potential Trump administration.

(With Reuters Inputs)