HSBC downgraded Indian stocks to “underweight” from “neutral”, citing the government’s lack of progress in fiscal or structural reform, little chance of positive surprises from corporate earnings and valuations more expensive than regional peers.
The action stands in contrast to upgrades for Indian equities from foreign banks such as UBS, Deutsche Bank and JP Morgan earlier this year, although more recently a handful of brokerages have cut their economic growth forecasts.
“If no concrete measures are taken (by the government) in the near term it could adversely affect the investment climate," HSBC on Wednesday said in a note.
India’s benchmark BSE index has rallied 15.5 per cent so far this year as of Tuesday's close, compared to a 8.1 per cent gain in the MSCI Asia-Pacific index excluding Japan.
The MSCI India index is trading at a 12-month price-to-earnings ratio of 12.7 times, marking a 10 per cent discount to its historical average compared to a 15 per cent discount for the region, HSBC said.
“This means valuations are less attractive than in some other markets, such as China,” it said.