HSBC upgrades India, downgrades China. Here are the sectors it likes now

India’s prolonged market underperformance is starting to look like an opportunity rather than a structural weakness for global brokerage firm HSBC, which has upgraded Indian equities to overweight and cut mainland China to neutral.

The global bank’s call comes after a multi-year valuation reset in India, stronger domestic credit growth and a more resilient earnings backdrop. HSBC said Indian equities now offer “diversification and low volatility in Asian markets dominated by AI stocks.”

HSBC had previously maintained a neutral stance on India and an overweight rating on China. It now believes India’s valuation premium has narrowed sufficiently, while earnings growth and domestic demand remain supportive.


“India’s investment case has become quite compelling relative to other markets,” HSBC said in its latest Asia equity strategy report.

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Credit growth, capex strengthen India’s case

Domestic activity has absorbed higher oil prices and interest rates better than expected, according to HSBC.

System-wide credit growth rose 21% year-on-year in October, with corporate lending increasing around 24% and credit to micro, small and medium enterprises rising 25%. Deposit growth also accelerated to more than 17%, compared with 12%–13% earlier.

HSBC’s banking team has raised its estimate for India’s FY27 loan growth to around 18%, from 14% previously.

The bank also pointed to signs of a recovery in private capital expenditure, stronger imports of capital goods, machinery and electronics, and sustained government spending. By August, the government had already spent 42% of its full-year capital expenditure budget, compared with 38% during the same period last year.

Corporate earnings are providing another layer of support. Consensus expects earnings growth of 14% in FY27 and 16% in FY28. HSBC expects some modest cuts to estimates in select sectors because of softer growth and margin pressure, but does not believe these revisions will be significant enough to alter the broader market outlook.

Valuations no longer look stretched

Indian equities remain the most expensive market in Asia, but the premium has narrowed, HSBC said.

The FTSE India index trades at around 19 times forward earnings, broadly in line with its long-term average. Largecaps have de-rated significantly and now appear less stretched relative to their own history and the wider Indian market.

Only 22% of global emerging market funds are currently overweight India, leaving room for foreign positioning to improve if earnings remain resilient and macro risks ease.

HSBC also said a possible removal of long-term capital gains tax for foreign investors could improve India’s appeal. However, it cautioned that tax relief alone would not determine the direction of foreign flows. Earnings growth, valuations, currency stability and the wider macro backdrop would remain more important.

Banks, autos and industrials top the list

HSBC’s preferred sectors in India are financial services, consumer discretionary, including autos, real estate, industrials and hospitals.

Within financials, the bank favours large private lenders because of broad-based credit growth, improving earnings momentum and better system liquidity. It also likes private insurers, where steady revenue growth and improving profitability are supported by more attractive valuations after the recent regulatory overhang.

In consumption, HSBC prefers discretionary businesses over staples. It favours retailers, particularly in fashion, jewellery and luxury, where companies are using new product launches and strategy changes to protect market share and improve margins.

Autos also remain a preferred segment, with sales holding up despite price increases by manufacturers.

Within industrials, HSBC likes capital goods, electronic manufacturing services and ports. It said manufacturing and electronics supply chains continue to benefit from capacity expansion, domestic data centre investment and broader infrastructure development.

The bank also likes cement because of strong volume growth driven by infrastructure and construction demand, although high input costs remain a risk.

Why HSBC is cautious on IT and staples

HSBC’s least preferred sectors are IT, consumer staples, oil and gas, utilities and pharma.

The bank said FTSE India IT trades at around 20 times forward earnings, below its five-year average of 23 times. But it cautioned that the lower valuation reflects slower growth rather than a straightforward buying opportunity.

IT earnings growth has slowed to around 2%–3%, from 4%–5% in recent years, partly because of AI-led deflationary pressure. HSBC expects FY27 to be the sector’s most challenging year, followed by a recovery in FY28 and FY29. Even then, growth is expected to remain in the mid-single digits.

Consumer staples have also de-rated, but HSBC still considers valuations demanding relative to the growth available elsewhere. Higher input costs, rising competition and uncertainty around rural demand remain concerns.

Why China lost its overweight rating

HSBC downgraded mainland China to neutral because it sees limited catalysts for a sustained market re-rating despite low valuations and supportive government measures.

Weak consumer confidence, property-market stress and softer domestic investment continue to weigh on growth. Passenger-car sales fell 28% year-on-year in August, retail sales rose only 1%, while fixed-asset investment declined around 7% year-to-date.

Southbound flows have weakened, and falling margin-financing and securities-lending balances suggest reduced investor appetite.

HSBC still sees opportunities in Chinese banks, consumer stocks with attractive yields, biotech and technology hardware linked to AI investment. But it believes recent policy measures provide a downside buffer rather than a powerful catalyst for fundamental growth.

HSBC warned that elevated oil prices, inflation and El Niño-related risks could still challenge India’s outlook.

Brent crude was around $99 a barrel when the report was prepared. Persistent energy costs could eventually hurt demand or pressure the rupee. India’s consumer inflation rose to 5.5% in September, a 23-month high, while weak soil moisture and depleted reservoirs could affect winter crops and rural demand.

Even with those risks, HSBC believes resilient earnings, stronger domestic credit growth and more reasonable valuations have created a more favourable backdrop for Indian equities.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)