10 Risk factors that can derail the Indian market rally, according to HSBC.
10 Risk factors that can derail the Indian market rally
HSBC Research Team has done a great job of anaysing the economic landscape of this vast sub-continen and pre-warns of the impending risks that can derail the Indian markets and it is for us to take advantage of these signals and initiate pro-active measures to avert a big disaster, particularly those in banking Sector to take cognisance of the warning signals and act. While the household savings is depleting fast which is a major cause of concern for the Economy as a whole, may be due to various reasons like inflation, the huge shift from Bank deposits to Capital markets -Primary, secondary and MFs is a gain for one viz., Stock markets and a great loss for Banks which is great concern and anxiety as that would derail the economic growth owing to reduction in lending resources kitty. The Govt’s tax policies like the new option for Salaried Tax-payers (like doing away with long term investment incentives) are in a way responsible for this catastrophe, not only for Banks but also for Insurance industry and Post Office savings schemes. This might fuel the inflationary trends sooner than later and the RBI might have to face unprecedented challenges in the days to come. The Banks through IBA and other channels might do well to bring this to the knowledge and notice of the RBI and GOI.
From uneven consumption growth to regulatory uncertainties, here are the ten risk factors that can derail the rally in Indian markets, according to HSBC.
Indian equity markets have had a bull run to remember so far. 13 out of the last 15 years have resulted in gains for investors. More than $100 billion have been poured into the markets in the last four years by just domestic institutions. The benchmark indices are trading close to record highs and valuations are lofty compared to other emerging market peers. So is there a scope for something to go wrong?
Brokerage firm HSBC has identified ten risk factors, which are not immediate threats, but can derail this ongoing rally on aggregate. They range from stress in the banking system, concentrated foreign investments among others. Lets take a look at each one of them individually.
Banking System Stress | The last few years have seen a tremendous exercise of balance sheet clean-up within the banking system with the Gross NPAs falling to 2.8% from well over 11% in 2017. The lowering of credit costs has freed up capital for banks for new loans. However, banks, over the last few months have highlighted threat to their asset quality, particularly within the unsecured personal loans and also pointed to increased individual leverage. HSBC believes that while this is not an immediate concern, there are still risks to profitability for financials, which in aggregate, account for one-third of India’s earnings, according to FTSE India.
Struggle To Grow Deposits | HSBC wrote that even after significant investments in the equity markets recently, majority of the Indians are still less exposed to the market. Only 8% of household assets are in the equity markets, the brokerage wrote in its note. Most of the wealth still remains in property, gold or bank deposits. Banks have raised deposit rates, thereby putting pressure on their Net Interest Margins. With loans growing faster than deposits, banks are facing challenges extend new loans. “This poses a downside risk to credit growth and may have negative consequences for earnings growth for banks,” HSBC wrote.
Sluggish Private Capex | According to HSBC Global Research’s economist Pranjul Bhandari, a major component of private capex, ‘Machinery and Equipment’ has seen a decline. This may also pose an earnings risk. “While there is weak overall private sector investment for the economy, this is not the picture we find when we examine the listed equity universe,” HSBC wrote. Listed company capex grew by 15% over 2023.
Weak, Concentrated Foreign Investment | The net foreign investment, which considers investment in India and adjusts for disinvestments, has nearly halved in 2023. That is because disinvestment has increased and investment has declined. The stock market rally, according to HSBC, has allowed private investors to capitalise on their investments in start-ups. They either exited after an IPO or sold stake during a rally. Whirlpool, Timken, BAT selling stake in ITC are a case in point. Even Gross FDI saw a decline last year, HSBC said. Even state-specific FDI is concentrated in Maharashtra, Karnataka and Gujarat, which account for 70% of that pie. However, improving infrastructure may enable further easy access to consumers, which can pose as an earnings risk to companies.
Unequal Consumer Growth | Urban consumption is doing well, rural not so, according to HSBC. First-time car buyers have been squeezed as most have used the stock market rally and credit card availability to upgrade, according to HSBC. There is divergence in the urban population too, with demand coming from the top of the income pyramid. Rural households though have not seen any benefit from the stock market rally, are much more exposed to food inflation and are in tune with the ups and downs of the monsoon.
The Earnings Risk | Most of the Indian equities rally rests on earnings growth remaining robust, according to HSBC. However, the brokerage is concerned by the current quarter results. “Earnings managed to grow just by double digits, which is not the sort of growth that we have seen in the past few years,” the note said. Certain sectors like capital goods and real estate provide good earnings visibility and are likely to see good growth in the second half of this year. HSBC advises investors to closely monitor the upcoming quarterly earnings.
ESG | HSBC highlights corporate governance as a key risk citing widely reported allegations around the governance and structure of certain corporates. “If allegations are proven to be true, it may raise general governance concerns about Indian equities,” the note said.
Regulations | HSBC believes that there is regulatory uncertainty, which can pose a risk to the market rally. Sudden change in rules and regulations can impact investor returns and investor confidence, the brokerage said. It cited the changes to the capital gains tax and curbs on purchases of long-dated government securities as examples.
Market Concentration | Some risks are associated with the market structure, according to HSBC. India’s weight in the EM and Asia indices stands at 23% and can increase further. HSBC believes that some funds having limited exposure to a single market may not allow them to buy more Indian equities. The brokerage also said that if interest in other markets like China increases, this may have to be funded by selling Indian equities.
Macro Risks | India is a large importer of oil and gold and a sudden increase in the price of these commodities can pose a risk to consumer demand, HSBC wrote. Despite these risks, HSBC remains overweight on Indian equities as it continues to have a compelling narrative for growth with various factors contributing to profitability of these Indian companies. “The profitability of large Indian companies is unusually high and corporate leverage is now less of a concern,” the HSBC note
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