HSBC downgrades Indian stocks to ‘underweight’

HSBC Holdings Plc on Monday downgraded Indian stocks from neutral to underweight following the recent sharp rally in Indian equities, saying it believes the downside risk to growth is most acute in Asia's third-largest economy.

The bank says that after the recent bounce, India looks relatively expensive and is most exposed to growth adjustments.

HSBC adds that it expects GDP forecasts to decline and earnings growth forecasts to follow suit.

''After the recent bounce, India looks relatively expensive and is most exposed to growth adjustments. We therefore take India down another notch to underweight from neutral, after the recent rally,'' Garry Evans, global head of equity strategy and Devendra Joshi, equity strategist, Asia Pacific at HSBC, said in a note.

Since 4 September, BSE's benchmark Sensex has risen 8.22 per cent, outpacing the 3.7 per cent gain in the MSCI Asia Ex-Japan Index.

HSBC expects gross domestic product forecasts to be cut across Asian countries and earnings growth forecasts to follow. Sales growth will be under pressure and margins will also be impacted by higher interest costs, and in some cases, higher input costs for those companies that source their raw materials from overseas, HSBC said.

''We expect this slowdown in growth to be most severe in India, when GDP forecasts are already cut from 5.5 per cent to 4 per cent for FY14,'' HSBC said in an Asia equity strategy note.