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India Stocks Face Greater Inflation Risk Than China, HSBC Says

Rising consumer prices make India’s stock market riskier than China’s, said Garry Evans, HSBC Holdings Plc’s global head of equity strategy.

India will increase interest rates by 150 basis points in the next 12 months to contain rising prices fueled by accelerating economic growth, HSBC forecasts. The nation’s consumer prices surged 14.9 percent in February, while China’s gained 2.7 percent, according to data compiled by Bloomberg.

“India has a much bigger inflation problem than China does,” Evans said in a May 4 interview in Hong Kong. “The Reserve Bank of India is behind the curve in tackling that.”

The MSCI India Index dropped 1.4 percent this year through yesterday following a 92 percent rally in 2009. Shares have faltered after the central bank raised interest rates twice and ordered lenders to set aside more cash as reserves in a bid to slow the fastest inflation among the Group of 20 nations. The MSCI China Index has declined 6.5 percent in 2010.

Globally, HSBC is “underweight” both China and India, meaning both the MSCI China and MSCI India indexes will underperform the MSCI All-Country World Index over the next two to three quarters, according to Evans.

Within Asia, the bank is “neutral” on China and “underweight” India, which means MSCI China will perform “approximately in line” with the MSCI Asia Pacific Index over the same period, while MSCI India will underperform the regional gauge, he said.

Evans is “particularly cautious” of the Indian stock market within Asia. Companies in the MSCI India Index are priced at an average 16.8 times estimated profit, more than the MSCI China Index’s 13 times.

China Interest Rates

“That’s a very big premium of India over China,” Evans said. “What happened since the end of last year is a lot of fund managers took their money out of China and they put it into India.”

HSBC forecasts China will raise its interest rates this quarter, and once more this year, by a total of 54 basis points, Evans said. The People’s Bank of China’s one-year best lending rate is currently at 5.31 percent. The last increase was in December 2007.

The central bank has been stepping up measures to curb property prices and prevent the world’s fastest-growing economy from overheating. Deputy Governor Zhu Min said March 25 that rate increases were a “heavy-duty weapon” and alternative measures were working well. The PBOC said on May 2 it will increase the amount banks have to hold in reserve.

“The consensus, particularly in the U.S., is already extremely negative toward China,” Evans said. “So the risk of there being more downside surprises is fairly limited because there is so much bad news that’s already well understood, and therefore priced in.”

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