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The analyst team at HSBC (0005.HK) (HSBA.L) has turned to bullish Chinese stocks and bearish Indian stocks, taking a "defensive" position ahead of a possible rate cut by the Federal Reserve later this month.
On Wednesday, Federal Reserve Chairman Powell paved the way for the first rate cut in 10 years in the United States later this month, promising to "take appropriate action" to defend economic expansion threatened by trade disputes and the global economic slowdown.
HSBC downgraded Chinese stocks in May to reflect such risks. But that view reverses as expectations of the Fed's rate cut rise, as it will support "cyclical" markets, those that rise and fall in tandem with the boom cycle.
Herald van der Linde, head of HSBC's Asia-Pacific equity strategy, said in a report Thursday that "in anticipation of the Fed's interest rate cut, we think it may be time to gradually reduce defensiveness in the coming months." In his report, he upgraded China's stock market from "neutral" to "overweight".
At the same time, HSBC downgraded India's stock market rating from "overweight" to "neutral" on the grounds that valuations were too high, and Indian corporate profits could be hit harder by trade tensions because "earnings expectations are much higher than China's".
HSBC pointed out that the capital inflows triggered by MSCI Mingsheng and other companies'inclusion of Chinese stocks in the index, as well as the start-up of the stock market on July 22, will support China's stock market.
China's Shanghai Composite Index. SSEC has risen 17% so far this year. But it fell by about 7.6% between early May and early June, when the trade war between the United States and China escalated again.


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