Shanghai shares have gained 17 per cent so far this year

Analysts at HSBC have moved to endorse Chinese stocks and cooled on Indian shares, in a "less defensive" positioning ahead of a potential interest rate cut from the US Federal Reserve later this month.

Fed Chairman Jerome Powell on Wednesday paved the way for the first US rate cut in a decade, pledging to "act as appropriate" to defend an economic expansion threatened by trade disputes and a global slowdown.

HSBC had downgraded Chinese stocks in May to reflect such risks. But that view reversed along with rising expectations of a Fed cut, which would support 'cyclical' markets - those that move in sync with the business cycles.

"In anticipation of Fed cuts, we believe it might be time to become gradually less defensive over the coming months," Herald van der Linde, HSBC's head of equity strategy for Asia Pacific, said in a report on Thursday, which moved China to 'overweight' from 'neutral'.

Meanwhile, the bank downgraded Indian shares to 'neutral' from 'overweight', citing expensive valuations, and that Indian earnings could take a greater knock from trade tensions as "expectations for earnings are much higher" than in China.

Capital inflows from index inclusion of Chinese stocks by the likes of MSCI Inc and the launch of a Nasdaq-style market - which will begin trading on July 22 - will also support the Chinese market, said HSBC.

Shanghai shares have gained 17 per cent so far this year. But they slid about 7.6 per cent between early May and early June as the US-China trade war re-escalated.