Will there be a lot of FII money? HSBC says Indian shares now offer better value than China’s

India could finally be entering a phase where its stock market appears cheaper, more balanced and better positioned for earnings recovery than China, according to a new strategy note from HSBC. The bank says global investors, who have spent most of 2025 chasing the artificial intelligence (AI) rally in Asia, are now looking for broader growth stories and India is one of the few major markets offering both value and improving fundamentals.HSBC says there could be a marked shift in 2026 away from the busy AI trades in Taiwan and Korea, where many global funds have reached allocation limits. The report notes that the average Asian portfolio now holds almost 10% in one stock – TSMC – leaving little room for more exposure. “Next year will see greater focus on other equity stories in the region,” the report said.

This rotation makes India a major beneficiary. It is currently the largest underweight in global emerging markets portfolios. HSBC’s data shows that only a quarter of the funds it tracks are overweight in India. This leaves significant room for foreign inflows as investors reallocate from the AI-heavy parts of Asia.“India now offers value versus Chinese equities,” HSBC wrote, adding that the recent underperformance of Indian markets has eased valuation pressure just as earnings are set to pick up. The bank expects margins for the financial sector to increase, and consumption-driven sectors such as the automotive industry to benefit from VAT cuts, lower borrowing costs and declining inflation.

India’s earnings recovery is key to HSBC’s bullish stance. For 2026, the bank expects a steady recovery, supported by better demand, lower interest rates and continued government spending. The index forecast sees the Sensex at 94,000 at the end of 2026, implying an increase of 11.3% from current levels, and maintains an Overweight rating for India.

The comparison with China is stark. Chinese shares rose sharply in 2025 despite very weak earnings growth, helped by massive domestic liquidity rather than foreign buying. Chinese households, which hold $23 trillion in cash, have funneled money into stocks, gold and real estate. Southern Stock Connect flows alone exceeded $168 billion this year. But HSBC warns that China’s rally is fragile as it relies on confidence rather than profits. The consensus expects earnings per share growth of just 4% in 2025, rising to 16% in 2026. The bank says any policy mistake or geopolitical fears could upset domestic buyers. “Continuing growth in Chinese stocks will require earnings per share growth,” the report said. This cycle is also different for global financial flows. Traditionally, a strong China meant that investors moved money out of India to invest in Chinese stocks. But HSBC claims that won’t happen this time because foreign investors weren’t the ones driving the Chinese rally. Instead, the increase came from domestic Chinese households. That means India and China can recover at the same time, driven by separate demand engines.

The background is the AI ​​trade, which according to HSBC has become too concentrated. In the next phase, investors will need to broaden their portfolios, according to the report, and that makes the situation in India more attractive – especially given the combination of lower valuations, expected earnings momentum and under-ownership.

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