HSBC, Citi turn bullish as domestic markets draw record inflows

Global banks are growing more optimistic about Indian equities as the country's stock market experiences its strongest rally in over four years, accompanied by unprecedented foreign inflows. HSBC Holdings Plc upgraded its outlook on Indian stocks, shifting from neutral to overweight, citing strong earnings and more attractive valuations.

Citigroup Inc. increased its projected 12-month target for the NSE Nifty 50 Index by nearly 8%, forecasting it could reach 28,000, citing improving profit growth and lower oil prices. These assessments suggest the recent rally in Indian equities may have room for further appreciation. The outlook represents a notable shift in sentiment following a prolonged period of underperformance, as investors seek markets less susceptible to the risks surrounding sky-high AI valuations.

HSBC strategists, including Herald van der Linde, favor sectors such as banks, industrials, consumer discretionary, insurance, and hospitals. The benchmark index has surged nearly 8% this month, the highest since July 2022, positioning India among the top-performing major markets worldwide. However, local stocks declined on Monday, deviating from the momentum seen in Asian counterparts, as investors cashed in profits from the recent rally.

Overseas funds invested a net $3.6 billion in local shares during the four days leading up to Thursday, positioning them on track for their largest weekly inflow on record. Preliminary data indicated an additional $1.5 billion of purchases on Friday. The shift signals a significant reversal after foreign investors largely withdrew their exposure to India over the past two years, as they pursued AI-driven gains in other Asian and US markets, leaving positioning relatively light.

Citigroup sees substantial potential for foreign positioning to rebound. A single percentage-point increase in active fund allocations to India could generate approximately $12 billion of inflows, according to analysts such as Surendra Goyal and Vijit Jain, given that AI has dominated investor attention and "crowded out almost everything else."

The brokerage expects Nifty earnings to grow by around 15%-16% annually over the fiscal years 2026-2028. Additionally, a $10 decrease in oil prices could boost Nifty earnings per share by approximately 2%.