Stories
India Emerges as Top Non-AI Diversification Play as Valuations Cool, Says HSBC
- •Indian equities are returning to global radar as valuations become more reasonable and investors seek alternatives to crowded artificial intelligence themes.
- •HSBC highlights that India offers a strong hedge against volatility due to its domestically driven economy and limited direct exposure to the global AI cycle.
- •Financials provide the best risk-return profile after recent market corrections, with a preference for private banks and diversified non-banking financial companies.
- •HSBC expects India Inc profit to grow 11 to 12 percent year-on-year in fiscal year 2027, which is slightly below current consensus estimates due to softening momentum.
- •Near-term constraints including rising bond yields, higher crude oil prices, inflation, and heavy IPO supply may continue to weigh on liquidity and secondary market upside.
Key Questions Answered
HSBC upgraded Indian equities back to neutral and noted that reasonable valuations offer a non-AI diversification play. The Nifty 50 trades at around 16 times forward earnings, while mid-cap valuations are roughly 24 times forward earnings. However, HSBC remains cautious rather than outright bullish due to modest earnings growth, rising bond yields, and higher crude oil prices.
HSBC considers financials to offer the best risk-reward profile, with a preference for private banks and diversified non-banking financial companies. Industrials represent its next preferred sector, highlighting opportunities in capital goods, defense, ports, electronics manufacturing services, and renewables. It also favors aluminium in metals and selective retailers and automakers in consumption.
Foreign fund flows are influenced by global financial conditions, rising bond yields, and shifting attention toward AI-linked opportunities. Persistent FII outflows and heavy primary-market IPO supply have put pressure on secondary-market liquidity. Despite these headwinds, more than four out of five global emerging-market funds remain underweight on India, presenting a long-term potential for significant inflows if they move closer to neutral.
