HSBC, Citi turn bullish as Indian stocks draw record inflows

Global banks, HSBC and Citi among them, are growing more optimistic about Indian stocks after the country's market experienced its strongest rally in over four years, attracting unprecedented foreign investments. HSBC upgraded its stance on local equities to "overweight" from "neutral," citing strong earnings and more reasonable valuations. Citi raised its 12-month target for the Nifty 50 Index by nearly 8% to 28,000, citing improving profit growth and lower oil prices.

These bullish assessments imply that India's stock rally may have further room to grow. They also suggest a broader swing in sentiment toward India after a prolonged period of underperformance. Investors are increasingly drawn to markets less susceptible to concerns over stretched AI valuations.

HSBC strategists, including Herald van der Linde, highlight India's value as a diversification option and a low-volatility option in Asian markets dominated by AI stocks. They recommend investing in banks, industrials, consumer discretionary companies, insurers, and hospitals. The benchmark index has surged nearly 8% this month, the greatest gain since July 2022, positioning India as one of the top-performing major markets globally.

However, local stocks experienced a slight decline on Monday, departing from the broader rebound observed among Asian counterparts, as traders booked profits from the recent rally. Overseas investors poured a net $3.6 billion into local shares during the four days leading up to Thursday, on track for their largest weekly inflow ever. Preliminary data showed an additional $1.5 billion in purchases on Friday.

This shift marks a significant reversal from the past two years, when foreign investors largely reduced their exposure to India as they pursued AI-driven gains in other parts of Asia and the US, leaving positioning relatively light. Citi sees considerable potential for foreign positioning to rebound, estimating that an increase of one percentage point in active fund allocations to India could generate approximately $12 billion in inflows, once AI "crowds out almost everything else."

Furthermore, Citi forecasts that Nifty earnings will grow by around 15%-16% annually over fiscal years 2026-2028. Additionally, the brokerage anticipates that cheaper crude oil prices will bolster the economy and corporate profits, estimating that a $10 decline in oil prices could increase Nifty earnings per share by nearly 2%.