Stock market: India back on investors’ radar as they warm to ‘non-AI stories’, says HSBC

"Financials provide the best risk-return, but we also like industrials for their growth opportunities," HSBC's Head of Equity Strategy for  Asia Pacific, Herald van der Linde, CFA, said.

The global investment bank forecast earnings growth of 11-12 per cent year-on-year in FY27 and said financials offered the most attractive risk-reward after the market reset.

Mid-cap valuations are also less stretched, while valuation premiums have eased notably in financials, information technology services, real estate and consumer staples. However, HSBC said some of this de-rating reflected weaker growth. It favoured financials because of an improved growth outlook.

After recovering over the past year, earnings growth is likely to lose some momentum in the second half of FY27, HSBC said.

Base effects are becoming less supportive, while elevated input costs and rising inflation could weigh on demand, particularly in rural areas. Consensus forecasts continue to assume mid-teens earnings growth in the second half, but the brokerage described this as slightly optimistic and expected modest downward revisions.

Investors are now more open to non-AI stories, while India provides diversification, according to HSBC.

However, relatively modest earnings growth leaves the market more exposed to rising yields and higher energy costs, which could keep foreign investors cautious. Lower bond yields and oil prices would be meaningful catalysts.

HSBC’s foreign exchange strategist also expects some short-term support for the currency, driven by healthy foreign exchange reserves and measures taken by the Reserve Bank of India. Initial public offerings and new issuances have meanwhile diverted liquidity from the secondary market, although the brokerage expects this drag to ease from early next year.

Among industrials, HSBC sees opportunities in capital goods, defence, ports and electronic manufacturing services, as well as renewables. It also favours private sector banks and diversified non-banking financial companies. Within metals, it prefers aluminium. In the consumer segment, the brokerage remains selective, favouring specific retailers and automotive companies over staples. For stock ideas, it referred to its report, ‘India offers diversification and stability’, dated 4 August 2026.

HSBC also flagged the risk from El Niño as food prices rise. Consumer Price Index food inflation accelerated to 7.7 per cent in September and could increase further as El Niño intensifies. The broader equity market has historically shown limited sensitivity to El Niño, although the impact on rural-facing sectors such as fast-moving consumer goods, tractors and agrochemicals can be more nuanced. Any weakening in the rural economy could also raise credit costs for lenders with significant exposure to these areas.