Yuan jitters make HSBC underweight on Indian equities

MUMBAI: HSBC is underweight on Indian equities on the grounds that the recent devaluation of the yuan may cause a domino effect on other currencies including the rupee and spark redemptions from most emerging markets.

The foreign bank has reiterated target of 26,900 for the Sensex as a section of the foreign investors are already pulling out of India. The Sensex closed at 27,831.54 on Tuesday.

"Continued logjam in Parliament combined with the devaluation of the yuan led to a sharp spike in outflows from India,” said HSBC’s Jitendra Sriram and Vikas Ahuja in a note to clients. For the week ended August 12, foreign investors, led by offshore exchange traded funds (ETFs), pulled $500 million out of Indian stocks, the highest weekly outflow in 74 weeks. Outflows from India for the week ended February 2, 2014 was $636 million, according to HSBC.

The rupee has dropped 2.3% against the dollar since August 11, when China first announced it was devaluing its currency. The stock market has been choppy since then with the Sensex declining 1% during the period.

"The delay in passage of key legislations such as Goods and Services Tax ( GST) and the Land Bill has kept investor sentiments subdued,” said the HSBC analysts. So far in August, foreign portfolio investors have net sold shares worth almost Rs 500 crore. In 2015, they have pumped about Rs 47,000 crore into Indian equities. Various top foreign brokerages have slashed their Sensex and Nifty targets in recent weeks, disappointed with the slow pace of the corporate earnings recovery.

Deutsche Bank cut its Sensex target for December 2015 to 31,000 from 33,000; Citi trimmed its target to 32,200 by yearend from 33,000. UBS slashed its Nifty target to 8,600 by December from 9,200.