Mumbai: HSBC on Tuesday raised its rating on Indian equities to “neutral" from “underweight", citing recent underperformance and more reasonable valuations.

“Since end-August, India underperformed because of issues in local banks, currency weakness and oil price volatility," HSBC analysts said in a note.

“Despite recent underperformance, these risks remain for Indian equity market. But investors’ holdings now lowest relative to history, valuations more reasonable, 2019e (expected) earnings growth highest in region," they said, adding, “We raise Indian equities from underweight to neutral in a regional context."

BSE’s 30-share Sensex rose 0.45% to close at 35,513.14 points on Tuesday, while the National Stock Exchange’s 50-share Nifty rose 0.54% to 10,685.60 points.

HSBC analysts said MSCI India EPS (earnings per share) growth consensus expectations are for 18.8% in 2018 and 24% in 2019, which means India is one of the fastest growing markets across the region.

However, five stocks—State Bank of India, Reliance Industries Ltd, ICICI Bank Ltd, Tata Consultancy Services Ltd and Axis Bank Ltd—account for nearly half of all 2019 earnings growth, they said, expressing concerns that they estimate 65% market-cap weighted average earnings growth for these five stocks.

Against this background of high growth and the much-anticipated rate hikes, India’s valuation now appears fair and almost in line with the five-year average 12-month forward PE (price to earnings), they said, adding that it was still far from cheap as India trades at 17.4 times whereas MSCI AxJ trades at 11 times.

“Meanwhile, investors’ weights in India are now at historically low levels and there is an opportunity to add to this. In the past, elections have tended to be a key catalyst for performance," HSBC analysts said. “A key risk is the dependency on a few large-cap stocks for growth. These are mostly banks. Thus, rising NPLs (non-performing loans) can quickly and significantly change India’s earnings outlook," they warned.

The currency could weaken from here, prompting more interest rate hikes, while lower oil prices are supportive now, HSBC said, though it expects oil to rise in 2019-20.

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