Is the Long Spell of Underperformance of Indian Equities Nearing Its End?

Caught amidst the crosshairs of Trump’s tariffs, a global trade war and faltering earnings growth, Indian equities have seen a weak run in the past year. They have underperformed emerging markets by 24% since mid-September 2024, primarily due to earnings weakness.

“Muted demand and intensifying competition have weighed on growth. Earnings estimates have been cut aggressively, and foreign investors have pared holdings in six of the past 11 months,” noted global brokerage HSBC.

The contrast with previous years is stark. After a period when earnings per share expanded at an annualised 25%, growth has slowed to single digits for five consecutive quarters. The downshift has rattled sentiment and made foreign institutional investors particularly cautious.

While some market watchers now see green shoots, the prevailing view is that upside potential in the near term remains capped. Uncertainty over tariffs, in particular, continues to cloud the outlook.

HSBC, however, points to several stabilising forces that might arrest the downside hereon. Rate cuts and benign inflation provide monetary support, fiscal measures such as tax cuts can lift demand, and valuations are less stretched than before. Moreover, US tariffs are expected to have only a limited impact on listed companies, and unlike in the past, a rally in mainland Chinese equities is no longer viewed as a direct threat to Indian markets, HSBC noted.

In HSBC’s view, several concerns that dominated last year are beginning to ease. “Valuations are more reasonable, the government is prioritising consumption, and the central bank is easing. With moderate inflation, this combination should support domestic demand. US trade tariffs are high, but the direct hit to corporate earnings is minimal,” it said. The rally in mainland China, meanwhile, is judged to pose little competitive threat.

Even so, the brokerage highlights four risks. Private investment remains lacklustre. Meanwhile, HSBC believes consumption can only go so far without a parallel rise in wages and capital spending. Banks face weak loan demand alongside higher credit costs. Technology firms are caught in a global slowdown, while consumer goods companies are faring better in rural India than in urban areas.

Consensus forecasts for 2025 put earnings growth at about 11%, but HSBC expects a more modest 8–9%, with any recovery likely to be gradual. While downgrades for 2025 have slowed, the outlook for 2026 hinges heavily on the effectiveness of policy support, and risks of further downgrades persist.

Another overhang is the sheer supply of equities. Insider selling through IPOs and secondary market issuances is rising, creating the risk that supply outpaces domestic demand. Yet here, domestic investors have been surprisingly resilient. Systematic Investment Plan (SIP) flows hit a record in July, with fresh inflows of ₹285 billion and total net equity inflows of more than ₹427 billion. HSBC sees this steady pool of domestic liquidity as the single strongest support for the market, capable of offsetting weak foreign inflows.

In addition, India also faces some of the steepest US tariff rates globally, but listed corporates are largely insulated. Less than 4% of BSE 500 companies’ revenues come from US goods exports, and pharmaceuticals, among the most exposed sectors, remain exempt for now. Even so, tariffs arrive at a difficult moment, when domestic consumption is already fragile. Export-oriented industries such as textiles and gems and jewellery could feel the squeeze, adding to pressure on both demand and credit.

Against this backdrop, HSBC maintains a ‘neutral’ stance on Indian equities in the regional context. In conclusion, supportive domestic flows and policy easing may prevent a deeper slide, but with demand weak, intense competition and private investment lagging, the road to a durable recovery still looks long.