HSBC upgrades Korea to Neutral and downgrades India to Underweight

Overview

This is an HSBC Asia equity strategy report focused on regional allocation adjustments: upgrading Korean equities to Neutral while downgrading Indian equities to Underweight. The main thesis is that against a backdrop of global uncertainty and Middle East conflict, Korea’s risk-reward has improved due to the unwinding of crowded foreign positioning, support from local capital, policy reform, and AI-related earnings growth; India, by contrast, has become less attractive because of dependence on energy imports, high oil prices, inflation pass-through, delayed demand recovery, FX pressure, and earnings downgrade risk.

Core views

The core views include: first, Korea is no longer the highly crowded consensus trade it once was, as foreign investors significantly reduced exposure to Korea—especially Samsung Electronics and SK Hynix—in February and March; second, Korean local retail and household capital remain important buyers, with the government encouraging funds to flow back into domestic capital markets through policies such as tax incentives, RIA accounts, Value Up reforms, and a potential National Growth Fund; third, Korea’s earnings growth is attractive, with FTSE Korea 2026 earnings expected to grow significantly faster than most major global markets, driven by memory, HBM, and AI infrastructure demand; fourth, India’s earnings recovery may be weakened by oil prices, inflation, softer domestic demand, asset quality pressure, and INR depreciation risk, reducing its attractiveness relative to North East Asian markets.

Analysis framework

The report uses a top-down regional equity strategy framework, combining capital flows, positioning crowding, policy catalysts, earnings expectations, valuations, macro shocks, and FX pressure to compare the relative allocation value of Korea and India. The Korea section focuses on foreign selling, local buying, capital market reforms, and the AI and memory earnings cycle; the India section focuses on energy prices under Middle East conflict, inflation, demand, bank asset quality, earnings downgrades, and valuation re-rating.

Methodology notes

• Regional allocationTop-down equity strategy

  Judging the relative attractiveness of different markets through the macro environment, policy, capital flows, earnings, and valuations.

  The report is not single-company research; instead, it compares Korea and India as regional equity markets and expresses allocation changes through upgrades and downgrades.

• Capital flows and positioningCrowded trade and position unwind analysis

  Heavy foreign selling can reduce prior crowded-trade risk, but it is still necessary to observe whether remaining positions are elevated.

  One of the key reasons for upgrading Korea is that foreign investors reduced positions in February and March, especially related exposure to Samsung Electronics and SK Hynix.

• Earnings cycleEarnings growth and revision risk analysis

  Upward earnings revisions support market valuations, while downward revisions can make seemingly cheaper valuations look expensive again.

  Korea is supported by AI infrastructure and memory demand, leading to strong earnings expectations; India, by contrast, faces earnings downgrade risk under an oil price shock.

• Macro pressureEnergy price and foreign exchange pressure transmission

  High oil prices can affect equity market earnings and foreign investor returns through inflation, demand, the current account, and exchange rates.

  India depends on imported energy, and the report argues that high oil prices may push up retail fuel prices, suppress demand, and increase INR depreciation pressure.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Korean equities

  Upgraded to Neutral, with improved regional allocation weight

  Strengths

  Foreign crowded trading has cooled, local investors continue to buy, policy encourages capital market participation, and AI and memory support strong earnings growth.

  Weaknesses

  Global uncertainty and Middle East conflict may keep volatility elevated, while leverage used by some retail investors to buy stocks may amplify market swings.

  Comparison

  Compared with India, Korea has stronger earnings momentum and clearer policy support in the current macro environment.

  Risks

  If memory demand slows, foreign investors continue large outflows, or policy reforms fall short of expectations, support for the Korean market may weaken.

• Indian equities

  Downgraded to Underweight, with reduced regional relative attractiveness

  Strengths

  Domestic demand through SIP channels remains resilient, and private banks, base metals, and some healthcare companies still offer structural opportunities.

  Weaknesses

  Highly dependent on imported energy; high oil prices may lift inflation, suppress demand, create non-performing loan pressure, and bring downside risk to earnings expectations.

  Comparison

  Compared with Korea and other North East Asian markets, India offers weaker risk-reward in the current macro environment.

  Risks

  Persistently high energy prices, INR depreciation, constrained foreign inflows, and a recovery in IPO supply without sufficient foreign demand.

• Samsung Electronics

  A key heavyweight for Korea’s earnings and foreign capital flows

  Strengths

  Supported by AI infrastructure investment and memory demand, making it an important contributor to Korea’s earnings growth.

  Weaknesses

  Foreign positioning had previously been concentrated, with significant selling from February to March.

  Comparison

  Together with SK Hynix, it forms the core of Korea’s AI and memory earnings cycle.

  Risks

  A reversal in the memory cycle, further foreign selling, or AI demand falling short of expectations.

• SK Hynix

  One of the core names in Korea’s AI and HBM theme

  Strengths

  A leader in HBM and Nvidia’s main HBM supplier, benefiting from global data center expansion.

  Weaknesses

  Earnings are highly dependent on the memory supply-demand balance and the AI capex cycle.

  Comparison

  It holds a stronger strategic position in HBM than most peers.

  Risks

  Intensifying HBM competition, oversupply, or a slowdown in AI infrastructure investment.

• INR

  An important macro variable for foreign investor returns in Indian equities

  Strengths

  If oil prices fall, FX pressure may ease.

  Weaknesses

  Faces depreciation pressure in a high oil price environment, which may drag on USD-denominated returns for foreign investors.

  Comparison

  Compared with Korea, India’s dependence on energy imports makes its currency more vulnerable to oil price shocks.

  Risks

  Persistently high oil prices, current account pressure, and intensified foreign outflows.

Key data

• Korea rating changeUpgraded from Underweight to NeutralBased on easing foreign crowded positioning, support from local capital, and AI-driven earnings growth.
• India rating changeDowngraded from Neutral to UnderweightBased on risks from energy prices, inflation, domestic demand, foreign exchange, and earnings downgrades.
• Foreign selling in Samsung Electronics and SK HynixApproximately USD21bn combined in February 2026About 3x the amount foreign investors bought in Korea in 2H 2025, with even larger outflows in March.
• FTSE Korea earnings outlookExpected to grow to about 3x in 2026Mainly contributed by Samsung and SK Hynix, driven by AI infrastructure investment and AI agent adoption.
• SK Hynix earnings outlook2026e operating profit expected to grow to about 4xThe report describes it as Nvidia’s main HBM supplier, giving it a critical position in global data center expansion.
• Korea RIA accountsMore than 90,000 opened in the first weekDesigned to encourage Korean retail investors to sell overseas stocks and repatriate funds into Korean assets.
• Korea RIA tax incentiveUp to 100% capital gains tax exemption on overseas stock sales before May 31, 2026Provided that funds are repatriated through RIA accounts and invested in Korean assets for at least one year.
• Korea dividend tax policyMaximum tax rate for shareholders of companies with dividend payout ratios above 40% reduced to 30%Previously, the relevant cash dividend tax rate was as high as 45%.
• India consensus expectationsCurrently expecting 16% YoY growth in 2026The report expects this earnings growth forecast to be materially revised down over the coming months.
• Historical relationship of oil price shocksA 20% rise in crude oil prices usually corresponds to about 1.5 percentage points of earnings compressionUsed to illustrate India’s earnings sensitivity to energy prices.

Impact & implications

The allocation implication is that Korea’s relative risk-reward has improved, but this is not an outright bullish call, so the rating is only upgraded to Neutral; India, meanwhile, has weakened in regional comparison, especially in an environment of high oil prices, INR pressure, and earnings downgrades that are not yet fully reflected. Investors should focus on Korea’s AI, memory, ESS, shipbuilding, defence, nuclear power, and certain consumer growth companies, while remaining alert to Korea’s still-elevated volatility and residual positioning crowding. For India, although private banks, base metals, and some healthcare companies still offer opportunities, the overall market has become less attractive relative to North East Asia.

Risks

• Korean market volatility may remain elevated due to Middle East conflict, global uncertainty, and leveraged retail trading.
• Although foreign investors have already reduced positions in Korea, holdings remain sizable overall, and some growth themes still need to be monitored for renewed crowding.
• Korea’s earnings growth is highly dependent on Samsung Electronics, SK Hynix, AI infrastructure, and memory demand; deterioration in memory supply-demand would undermine the investment thesis.
• High oil prices in India may feed through inflation, retail fuel prices, domestic demand, and bank non-performing loans into earnings downgrades.
• Although Indian valuations have retreated, they may appear expensive again if earnings expectations are revised down.
• The INR faces depreciation pressure in a high oil price environment, which may weaken foreign investors’ expected returns from Indian equities.
• A recovery in India’s IPO activity requires matching foreign demand; otherwise it may pressure market supply and demand.

What to watch

• Subsequent net buying and selling by foreign investors in Samsung Electronics, SK Hynix, and the KOSPI.
• Whether Korean local retail investors continue to channel funds back into the domestic market through direct equities, ETFs, and RIA accounts.
• The pace of implementation for Korea’s Value Up reforms, minority shareholder protection, MSCI developed market upgrade agenda, and the National Growth Fund.
• Whether AI infrastructure investment, AI agent adoption, and the DRAM and HBM supply-demand gap can continue to support upward earnings revisions in Korea.
• Non-memory growth themes in Korea, including ESS, shipbuilding, defence, nuclear power, and cosmetics companies, in terms of earnings and positioning crowding.
• The impact of Middle East conflict and oil and gas market tightness on India’s imported energy costs.
• Whether India’s retail gasoline and diesel prices rise after state elections, and how that feeds through to inflation and consumer demand.
• Whether India’s consensus earnings expectations are revised down from the current 16% YoY growth expected for 2026.
• The INR trend, foreign capital inflows, and the market’s ability to absorb funding after IPO supply recovers.