Indian markets set for a multi-year rally, cyclical stocks to lead: HSBC

NEW DELHI: India has been among the best performing markets in 2014, with the market up about 30 per cent in the calendar year 2014. HSBC which an 'overweight' rating on the Indian markets say that the pace of initial gains is likely to slow as valuations have rerated and are a bit stretched.

"We are overweight on India and we believe that it is set for a multi-year rally as reform momentum combines with an improving macro picture," said the HSBC report.

"We expect some monetary easing ahead as inflation continues to slide, which should further boost equities. However, the pace of initial gains is likely to slow as valuations have rerated and are a bit stretched," added the report.

As per the global investment bank, corporate earnings will drive the next leg of the recovery as the economy strengthens, leading to better demand, improved asset utilisation and higher earnings.

Consensus is forecasting 16.7 per cent earnings growth in 2015, which looks achievable, given the reform-driven recovery in the domestic economy expected in 2015.

However, the recent rally in equities has pushed up valuations to a high level and, therefore, selected investment in high-quality stocks is important here, said the HSBC report.




The economy seems to be headed in the right direction in the year 2015. According to HSBC's economics research team, 2014 should be the low point for GDP growth. We forecast GDP growth will accelerate to 5.8% in 2015 and 6.6% in 2016.

Further, HSBC's FX strategist Paul Mackel expects the INR to be relatively resilient against the USD in 2015. He sees this appreciation as a function of positive policy direction and better macro fundamentals.

This should benefit domestic importers, such as autos, and safeguard the interest of foreign investors, in our view.

HSBC prefers to participate in the market via domestic cyclical sectors, such as industrials, materials, energy, consumer discretionary and utilities, rather than defensive sectors.

The view is however based on the expected fall in interest rates, attractive valuations, an improving macro picture, and under-ownership by foreign institutional investors in cyclicals.