HSBC downgrades Indian markets to 'Neutral,' slashes Sensex target for 2025

HSBC has revised its Sensex target for the end of 2025, lowering it to 85,990, from 90,520 earlier

HSBC downgrades Indian equities: Analysts at HSBC, the London-based financial services firm, have downgraded Indian equities to 'Neutral' from 'Overweight.' The shift reflects tempered optimism for the market's performance amid concerns over high valuations and slowing growth momentum.

 

The brokerage has also revised its Sensex target for the end of 2025, lowering it to 85,990, from 90,520 earlier. The new target reflects an upside of 10.03 per cent from the January 8 closing level of 78,148.49. 

 

“While growth remains robust, downgrades matter because India’s earnings multiples are high. As earnings stall and markets recalibrate their earnings expectations, we see muted market returns in 2025,” Herald van der Linde, Prerna Garg, Adam Qi and Varun Pai of HSBC said, in a note. 

 

Factors behind the downgrade

 

After years of a robust rally, Indian equities have recently witnessed a downturn. Since peaking in September 2024, the FTSE India index has declined 12 per cent in USD terms. The decline, analysts believe, stems from a mix of unfavourable global factors and a domestic cyclical growth slowdown.

 

Despite India’s relative resilience to global uncertainties, the combination of elevated valuations and cyclical challenges has constrained near-term upside potential. 

 

“India is one of the best structural stories in the region,” HSBC analysts highlighted. The market benefits from a young demographic profile, expanding consumer segments, and ongoing investments in both physical and digital infrastructure. Additionally, India's growing share in global trade and record-high forex reserves provide stability against currency volatility.

 

Sector-specific trends and economic dynamics

 

Earnings growth, which had been robust since 2020, has slowed in recent quarters. The banking sector, which holds the largest weight in India’s market, is grappling with the aftereffects of stringent monetary policy measures, analysts said. These have dampened credit demand and squeezed interest margins as banks compete for deposits. 

 

Meanwhile, the tech sector, the second-largest, is underperforming due to a sluggish recovery in overseas demand. Although rural demand is showing signs of improvement, urban consumption remains subdued.

 

Government capital expenditure has been relatively weak, but an eventual uptick could bode well for manufacturing sectors. The Reserve Bank of India (RBI) has refrained from cutting policy rates amid persistently high inflation but has taken steps to ease liquidity. 

 

Pranjul Bhandari, HSBC’s Chief Economist for India and Indonesia, expects further monetary easing, predicting two repo rate cuts of 25 basis points each in February and April 2025.

 

Market outlook

 

Foreign fund outflows have amounted to $12 billion since September 2024. However, resilient demand from domestic investors has provided some support to the market. Indian equities also retain strong defensive characteristics in the face of global uncertainty and may benefit from potential shifts in trade policy under the new US administration.

 

HSBC on other Asian markets 

 

HSBC, however, maintains a positive outlook on select Asian markets, particularly China, Hong Kong, and South Korea. The brokerage has an 'overweight' rating on China. Hong Kong has been upgraded from 'Neutral' to 'Overweight,’ while South Korea has been raised from 'Underweight' to 'Neutral.'

 

Conversely, HSBC continues to hold a cautious stance on Taiwan, Japan, and Singapore, maintaining an 'Underweight' rating for these markets.