HSBC maintains underweight stance on India

Elections a watershed; pent-up demand to be released after elections

HSBC Global Research has maintained its underweight rating on India citing lofty earnings expectations and high foreign fund exposure as the key reasons. The foreign brokerage described the upcoming general elections as ‘watershed’ after which the recovery in growth would start slowly.

“India’s economy is still stuck in a rut. A fiscal drag in the first half of the year (most of the Budget was spent last year), weaker consumption and stalled investment prevent the economy from building any sort of momentum,” said HSBC’s equity strategists led by Herald van der Linde in a client note.

The Dalal Street is betting on a Narendra Modi-led Bharatiya Janata Party (BJP) to form the next government as investors have been disappointed with the Congress-led United Progressive Alliance’s (UPA) handling of the economy. However, HSBC expects pent-up demand in the economy to be released soon after the elections, irrespective of who forms the government.

“Companies that have shelved expansion plans will at some point start investing and hiring, while the bureaucrats will resume the approval of new infrastructure projects,” said the HSBC strategists, while setting a target of 21,750 for the benchmark Sensex. The index closed at 20,700.75 on Friday.

“Year 2014 could thus prove to be a tale of two halves: with some, albeit modest, economic recovery and return to normal business conditions emerging in the latter half of the year,” the strategists said.

HSBC said the likelihood of some corporate spending after the elections has boosted the prospect of cyclical sectors such as energy, power, non-ferrous metals, and telecom, whose shares have been underperformers. The brokerage recommends ONCG, L&T, Sesa Sterlite, Bharti Airtel, and Maruti Suzuki.