Nifty valuations now in-line with 5-year average; what HSBC MF says on midcaps, smallcaps

HSBC Mutual Fund in its latest note said the growth cycle in India may be bottoming out and that it is constructive on Indian equities, supported by the more robust medium-term growth outlook. 

Interest rate and liquidity cycle, decline in crude prices and normal monsoon are all supportive  of a pick-up in growth going forward, the mutual fund said.

"Post the recent correction, Nifty valuations are now in-line with its 5- and 10-year averages. We remain constructive on Indian equities," it said. 

To be sure, Nifty consensus EPS estimate for Calendars 2025 and 2026 has revised downward by 2 per cent and 3 per cent, respectively during April. This along with the market recovery, Nifty now trades on 20.1 times one-year forward PE. This is now in-line with its 5-year average and a 10 per cent premium to its 10-year average. 

"Valuations in Midcap and Smallcap space have also moderated following the sharp correction over  January and February," HSBC MF said.

HSBC views were similar to that of foreign brokerage UBS, which on Tuesday retained its positive stance on the Indian stock market and set a 12-month target of 26,000 for Nifty. The broking firm, however, sees prospects of 6 per cent downside on the 50-pack index -- in case of a global growth slowdown. 

HSBC said the global macro environment remains challenging with heightened geo-political and economic uncertainties. Announcement of reciprocal tariffs  by the US administration could significantly impact US and global growth  outlook, if the tariffs stay in place. 

"For India, GDP growth has improved to 6.2 per cent (YoY) in Q3FY25. We believe government has tried to partly address  the slowdown in private consumption through the income tax rate cuts in the Union Budget. However, a pickup in private capex will be critical as government capex is moderating. RBI is also now trying to ease policy rates  and liquidity conditions rapidly. With USD weakening and decline in crude  prices the room for easing has increased further," HSBC MF said. 

"Although, global trade related  uncertainty remains a headwind to private capex in the near term, we expect 
India’s investment cycle to be on a medium-term uptrend supported by  government investment in infrastructure and manufacturing, pickup in private  investments and a recovery in real estate cycle. We expect higher private 
investments in renewable energy and related supply chain, localization of  higher-end technology components, and India becoming a more meaningful  part of global supply chains to support faster growth," HSBC MF said.