The big, easy 'buy' story in Asia over; remain underweight on India: HSBC

Substantial US stimulus is likely to create an overheating threat to emerging markets (EM) equities, said analysts at HSBC in an April 15 note. The only silver lining for EMs, they feel, is a dip in bond yields that can trigger an upside.

The research and brokerage house has maintained an ‘underweight’ rating on India, Taiwan and Pakistan. Hong Kong, Singapore, Thailand and Indonesia is where HSBC remains 'overweight', while remaining 'neutral' on Mainland China, Japan, Philippines, Malaysia and Korea.

"The big, easy buy story in Asia looks over; we’re now in for a tough grind as a lot of high growth narratives get repriced. We increased our cyclical exposure in European sector weightings as the outlook for economic recovery improves," wrote analysts at HSBC led by Dr. Murat Ulgen, their global head of emerging markets research.

Despite the ongoing pandemic, HSBC has raised their 2021 global and EM gross domestic product (GDP) forecasts to 5.6 per cent (from 4.8 per cent) and 6.6 per cent (6.1 per cent), respectively.

“In EM, the mood music has changed with emphasis shifting more towards inflation than growth in the global reflation debate. EM is likely to face more challenges in balancing recovery prospects and price pressures, especially relative to the US,” HSBC said.

FY22 GDP forecast retained

As regards India, HSBC believes that the pent-up demand on account of the stringent lockdown put in place for a few months in 2020 has lost steam. That apart, rapidly rising Covid cases pose a challenge to the overall economic growth.

“Pent-up goods demand has been the main driver of the economic rebound. But it has run its course, now back to pre-pandemic levels. Conversely, pent-up services demand remains 20 per cent below pre-pandemic levels and could be the main driver of growth from here although the recent rise in infections poses a challenge,” HSBC said.

Over the past few days, several key states and cities have announced mobility curbs and mini-lockdowns to 'break the chain' of the Covid infections.

“With gross value added (GVA) likely to be weaker (trending at +0.7 per cent y-o-y, based on monthly data releases so far), GDP growth for the quarter ending March could come in even more negative (trending at -2.3 per cent y-o-y currently versus +0.4 per cent in the previous quarter). Furthermore, the q-o-q sequential momentum in the quarter ending June will likely come in negative. Led by favourable base effects, the y-o-y growth number will be a large positive (over 20 per cent y-o-y versus –24.4 per cent in the June quarter last year),” wrote Pranjul Bhandari, chief economist for India at HSBC in an April 14 coauthored note with Aayushi Chaudhary.

For now, HSBC has retained its GDP forecast of 11.2 per cent y-o-y for fiscal 2021-22 (FY22). “There were upside risks to these numbers before the second wave struck, which have gone away for now. If lockdowns intensify or spill over well into May, downside risks would emerge,” Bhandari and Chaudhary said.