India offers growth, diversification as AI stocks dominate Asian markets: Report

New Delhi: India offers a combination of growth, earnings resilience and diversification amid Asian markets increasingly dominated by artificial intelligence (AI) stocks, according to a report released on Monday.

A report by HSBC Global Investment Research -- which has upgraded Indian equities to overweight from neutral -- said that the country's strong credit growth, resilient earnings and measures supporting economic growth and the currency strengthened its outlook for the market.

The upgrade follows a multi-year valuation reset and significant underperformance by Indian equities compared with emerging markets (EM), it added.

While the coming quarters could see modest earnings downgrades if energy prices remain elevated, HSBC does not expect these to be significant enough to materially affect overall market sentiment.

Moreover, global crude oil prices have eased somewhat to around $99 per barrel.

HSBC said India’s economic growth has remained resilient despite macroeconomic shocks, including higher interest rates and oil prices. Earnings momentum has also improved, with the pace of downgrades becoming considerably more modest.

Valuations have turned more reasonable, particularly among large-cap stocks, while only 22 per cent of global emerging market (GEM) funds are overweight India, indicating scope for further investor interest.

Among sectors, HSBC favours banks, supported by an improved growth outlook as well as industrials, particularly capital goods, cement, ports and electronic manufacturing services.

Within the consumption segment, the report prefers consumer discretionary stocks over staples with a focus on retailers and automobile companies.

Despite recent regulatory uncertainty, HSBC also sees opportunities in insurers and hospitals, citing their growth potential.

However, it cautioned that sustained elevated energy prices could put pressure on domestic demand and the currency.

Although demand has remained relatively resilient so far, rising inflation could weigh on consumption, particularly in rural areas, it said.

On the other hand, HSBC downgraded China's rating to neutral from overweight citing limited catalysts for a sustained market re-rating despite low valuations following the recent sell-off.

HSBC acknowledged that high total shareholder yields, national buying and recent policies supporting capital markets could provide a downside buffer for Chinese equities.