HSBC cautious, underweight on Indian equities

New Delhi: Notwithstanding recent volatility in Asian markets, some factors are supporting the region's equities, global brokerage major HSBC has said noting that it is 'cautious' and 'underweight' on India.

The global financial services major which is "overweight" on China said factors like stronger Asian currencies and better prospects for earnings growth are supporting the Asian equities.

The global brokerage firm said though the recent Budget created some optimism in markets as the government stuck to its fiscal consolidation roadmap, but was apprehensive about the quality of fiscal consolidation.

"Fiscal consolidation has been applauded although we highlight this is meant to be achieved through telecom spectrum auctions and selling government stakes in companies," HSBC said adding that "missing these targets could limit the government's ability to spend unless it steers away from its fiscal consolidation targets".

The fiscal deficit target of 3.5 percent for financial year 2016-17 is in line with the original fiscal consolidation plan and comes despite a challenging economic environment.

The report further said the transmission of monetary policy does not seem to be functioning successfully in India.

"Weak business sentiment, overcapacity, stressed assets in the banking system and the slow pace of implementation of government infrastructure projects are just a few of the causes of weak credit demand," it noted.

Moreover, impaired monetary transmission does not bode well for corporate earnings growth.

"We argue that earnings downgrades will continue to weigh on the local equity market," it said.

Within an Indian context, HSBC India strategist Devendra Joshi prefers consumption plays which are less sensitive to these issues of weak monetary transmission and risks to fiscal spending plans.

According to market experts domestic woes, including ballooning NPAs reported by banks and weak quarterly numbers in various other sectors, also added to the Indian market weakness recently.

Since the start of the year, market benchmark Sensex has fallen by roughly 1,400 points or 5.35 percent.