Economy

HSBC Downgrades Stock Market, First Sign of India Story Going Wrong

New Delhi: As global investors shift focus from India to the stock exchanges of China, Taiwan, South Korea and Brazil, there was some bad news for Indian markets on Wednesday.

In a reflection of bearish investment sentiment and growing concerns about the pace of reforms in India, HSBC on Wednesday cut its rating of Indian shares to “underweight” from “overweight”, saying markets were over-owned at a time when earnings were expected to slow and the scope of interest rate cuts were diminishing. The downgrade to underweight is the first by a major foreign bank since Indian shares began a rally last year that culminated with the NSE and BSE indexes hitting record highs in early March.

The downgrade comes at a time when foreign investors have sold nearly $2.2 billion worth of cash shares in the last 16 sessions, excluding Japan’s Daiichi Sankyo’s block sale of Sun Pharmaceutical Industries shares.

The shine has come off Indian markets over the past few weeks as anger over minimum alternate tax (MAT) claims against FIIs badly hit sentiment at a time of rising volatility in global markets. Worries about the slowing pace of reforms have also contributed to the falls.

On Tuesday, despite initial claims about the GST Bill being passed by the  Rajya Sabha, the government backed down and referred the matter to a Select Committee, delaying by a few months one of the biggest tax reforms of recent times. The situation was no different for the Land Acquisition Bill, which will now go to a Joint Committee of Parliament where it will be  debated and perhaps amended. Although HSBC did not refer to the reforms process or it being stalled in its note, it recommended investors cut their positions in India. “India remains one of the most over-owned markets in Asia, but earnings growth is slowing and there is little room for further rate cuts,” HSBC said in its note.

That marks a reversal of the heavy foreign buying of Indian shares since 2014 that had made the country “the most liked” among emerging markets, according to a Citigroup note this week. Global investors are now shifting their funds to emerging markets such as China, South Korea and Taiwan.

In a related development, global rating agency Moody’s said Indian PSU banks will need years to improve their credit profiles. “A longer time-frame is needed for the credit profiles of public-sector banks to improve, because their asset quality is tied to the slow, multi-year recovery of corporate balance sheets and the lagging recognition of associated credit costs,” Moody’s Vice President & Senior Credit Officer Srikanth Vadlamani said in a report.

The overall debt servicing metrics of Indian corporates are weak, which exhibit very high debt levels and will require years to improve, he said. Improvement in credit profiles of Indian public-sector banks, which account for more than 70% of total banking system assets in India, will be achieved only in the medium-term, given their high levels of impaired loans and weak capital positions, the report said. “The improvement in the asset quality of Indian public sector banks for the fiscal year ended March 31 was marginal and much weaker than we had expected at the start of the same year,” said Vadlamani.

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