Attention! Turning point on D-St may be near, as HSBC points out undervalued equities, tariff relief, and reforms as key triggers

Investors on Dalal Street who have been sitting on the sidelines may need to start paying attention, as a turning point in the domestic equity markets could be near, according to HSBC Global Investment Research. The global financial services firm believes the domestic equities appear undervalued, and two key catalysts could revive market sentiment. First, a halving of the tariff rate imposed by the US on India would remove a major drag on growth. Second, a string of growth-enhancing reforms, building on the momentum of GST rationalisation, could lift potential growth expectations and drive returns higher.
 
Indian equity markets have largely disappointed equity investors over the past year. The benchmark equity index BSE Sensex declined nearly 1% to 82,380 on September 16, 2025, from 82,989 on September 16, 2025. On the other hand, the broader indices BSE Midcap and BSE Smallcap slipped more than 5% during the same period. Meanwhile, foreign institutional investors offloaded shares worth more than Rs 1.50 lakh crore.
 
HSBC Global Investment Research also said that equities are impacted relatively more by global factors than local, and especially by the global growth outlook. Then come the local factors, where both liquidity conditions and potential growth expectations play an important role.
 
“One may think that the outsized impact of global factors is at odds with the common perception that domestic inflows in equities hold up the market. Indeed, it has played an important role. Yet we believe that while domestic flows put a floor on markets, keeping them from correcting too much, it is FII inflows that are needed for markets to rise sharply,” the global firm said in a report.
 
While commenting on various asset classes, HSBC Global Investment Research said, “As per our model, equities seem undervalued, foreign exchange at fair value, government bonds neutral, and corporate bonds overvalued.”
 
It also added that the domestic macro has turned much more favourable for equities. Inflation has softened significantly from above 6% YoY in October 2024 to an eight-year low of 1.6%. This has allowed the central bank to cut rates and ease lending standards. Additionally, the government has also turned its focus on boosting consumption. This slew of measures, including the income tax cuts in February and the overhaul in GST more recently, can help in restoring confidence in the market.
 
Meanwhile, the consensus has adjusted its growth expectations to more reasonable levels. Consensus estimates for 2025 put earnings growth at 11%. “We expect forecasts to settle at around 8-9%. The growth recovery is likely to be gradual, but we think the risks are reflected well in valuations. Valuations have come off quite a bit, both against history and relative to other major Asian peers like mainland China. The good news is that domestic investors have proved to be more resilient than many expected,” HSBC Global Investment Research said, adding there are still concerns that need attention.
 
Private capex is subdued. However, it believes that tax cuts can help boost consumption over the near term, but investment and wage growth will have to pick up for a more sustained revival in consumption. And lastly, the supply of equities is at a record high. New stock issuances exceed domestic demand, leading to equity oversupply.