Global investors continue to favor Taiwan and South Korea over India as artificial intelligence-driven demand fuels strong earnings growth in East Asian markets, according to Herald Van Der Linde, Head of Asia Equity Strategy at HSBC.

Van Der Linde explained that while India attracted some foreign investor interest late last year, attention has shifted back to markets benefiting from AI supply chain momentum. "The attention left India for the moment," he said, noting that the move relates more to developments in other markets than issues specific to India.

AI Supply Chain Drives East Asian Markets

Companies in Taiwan and South Korea are experiencing robust order flows as data center construction accelerates in the US, creating strong demand for servers, chips and cooling systems. This momentum has led to continued earnings upgrades for major firms including TSMC, Hynix and Samsung.

HSBC had previously upgraded India to "overweight" status, expecting the AI trade to become crowded and prompt investor rotation back to India. However, this anticipated shift has not materialized as investors remain reluctant to exit markets still delivering strong returns. "The other markets, for the moment, are too good to ignore," Van Der Linde said.

India's Mixed Outlook

Despite being overshadowed by AI-focused markets, India's investment outlook has shown slight improvement. Van Der Linde noted moderating valuations and early signs of earnings upgrades, though investors remain cautious due to currency movement concerns and uncertainty over near-term earnings growth.

The strategist identified three main risks facing India:

• Currency volatility: Rupee movement creating investor uncertainty
• Earnings sustainability: Questions over the strength and durability of earnings recovery
• Competitive pressure: Long-term margin compression as competition increases

Van Der Linde cited Indonesia as an example where infrastructure expansion eventually led to increased competition and slower profit growth over time, illustrating potential challenges India may face.

Sector Preferences and Investment Strategy

For Indian equities, HSBC favors domestic-focused sectors that can benefit from local economic growth while remaining less exposed to global market volatility.

For foreign investors concerned about currency risk, Van Der Linde suggested holding IT stocks as a hedge against rupee volatility.

Broader Market Views

The strategist also shared positive views on gold, citing strong central bank buying as institutions seek to reduce dependence on the US dollar. Limited supply combined with steady demand continues supporting gold prices.

Regarding China, Van Der Linde noted a different dynamic, with domestic investors rather than foreign funds driving stock purchases in that market.

Van Der Linde emphasized the significance of India's Union Budget in signaling government policy direction, though he cautioned that markets may sometimes focus on it excessively. The budget attracts substantial attention from investors seeking clarity on policy priorities and economic direction.

HSBC has issued bullish recommendations on three major Indian metal companies, upgrading Hindustan Zinc Limited and raising price targets across the sector. The brokerage's optimistic outlook is based on expectations of a potential metals super cycle driven by structural demand changes and supply constraints.

HSBC's Rating Actions and Price Target Revisions

The brokerage made significant changes to its coverage of Indian metal stocks on Monday, January 19:

The most notable change was Hindustan Zinc's upgrade from 'Hold' to 'Buy', accompanied by a substantial 44.23% increase in the price target. HSBC maintained its positive stance on Hindalco Industries and NALCO while raising their respective price targets.

Super Cycle Expectations Drive Optimism

HSBC's Global Metals team outlined the rationale behind their bullish outlook, citing multiple factors that could trigger a super cycle in select metals. The brokerage identified strong demand from emerging sectors such as electric vehicles and energy storage systems as key growth drivers. Additionally, a prolonged lack of investment has led to slower supply growth, creating potential supply-demand imbalances.

Ongoing supply constraints and disruptions further support the case for higher metal prices. HSBC expects specific metals to benefit more than others from these trends:

• Key beneficiaries: Copper, aluminium, battery raw materials, and platinum group metals
• Underperformers: Bulk commodities expected to continue lagging

Market Performance and Trading Activity

Despite the positive analyst recommendations, the broader metal sector faced headwinds on Monday. As many as 10 stocks on the Nifty Metal index were trading with losses during the session. However, Hindustan Zinc and Hindalco Industries emerged as notable exceptions, ranking among the biggest gainers on the Nifty Metal index with gains of up to 2.00% each.

The contrasting performance between these upgraded stocks and the broader metal index highlights the market's selective approach to the sector, with investors potentially responding positively to HSBC's specific recommendations while remaining cautious about the overall metal space.