BofA Securities has revised its Nifty target for December 2023 to 20,500 from of 18,000 following a shift in perspective — from expecting a mild recession to anticipating no recession in the US.
The change addresses a major market concern and provides the basis for ongoing valuation growth, BofA said in a report on August 8. The Nifty target is 14 percent higher than the May prediction of 18,000 and 4.5 percent above the current market price.
"By Dec 2023, we expect Nifty to gain further to 20.5k, as a) historically, Nifty's returns have mostly been positive at least three months prior to the end of US recession as well as during the phase of Fed’s penultimate rate hike to six months after the start of rate cuts (current phase)
“b) domestic inflows could continue to be robust & c) a third of Nifty market cap still below long-term average valuations: few of which offers buying opportunity,” BofA said in a note to investors.
Risks and blips
Any unexpected setbacks to the US economy, fiscal policies, or monetary tightening could exert downward pressure on the market. The forthcoming busy election schedule in India, too, is a risk to monitor, it said.
Given these considerations, it prefers largecaps. Valuations for small and medium-caps appear to be elevated, while estimates for earnings growth appear to be stretched, it added.
The brokerage expects a short-term downturn due to the risks arising from the recent surge in crude prices, inflationary pressures resulting from unpredictable rainfall patterns and the upward trajectory of commodity prices driven by potential stimulus measures in China.
The impact of these factors, however, could be temporary and not of significant magnitude, it said, advising investors to capitalise on declines in the market.
Its analysis, for instance, indicates that while China's stimulus efforts might lead to foreign institutional investor outflows from India in the near term, the trend tends to reverse on an annual basis.
A contraction in the Nifty's valuations could trigger substantial active inflows from domestic institutional investors, thereby curbing the potential downside, BofA said.
The brokerage is cautious about Nifty's earnings growth, projecting lower figures for FY24 and FY25 (13 percent and 11 percent, respectively) against 17 percent consensus.
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Stock picks
It advises avoiding sectors prone to earnings downgrades, especially those reliant on margin expansion due to rising commodity prices. Sectors that recently rallied due to valuation increases, rather than earnings improvements, should also be approached carefully, it said.
BofA is cautious about IT, certain parts of the auto and discretionary sectors, metals, cement, telecom, utilities, and materials. The recommendations reflect its evaluation of risks associated with these sectors based on the risks mentioned above.
BofA maintains the “overweight” stance on financials due to attractive valuations and limited earnings risks. It is also “overweight” on industrials due to strong capital expenditure and real estate trends.
In the automobile sector, passenger and commercial vehicles are projected to grow and also improve margins. Healthcare remains promising due to favourable pricing in the US and robust specialty business in India.
BofA has upgraded staples to “overweight" on rural recovery indicators, shifted consumer discretionary to "neutral" and downgraded cement and utilities to "underweight" due to potential earnings risks from costs and regulations.
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