MC EXCLUSIVE Market likely to give high-single digit CAGR return over medium term, says BofA Securities' Amish Shah

BofA Securities head of research Amish Shah .

Bank of America (BofA) Securities’ head of research Amish Shah is cautious on the Indian market for the remaining months of 2025. One should expect high single digit returns compound annual growth rate (CAGR) over the medium term, he has told Moneycontrol.

He estimates 25,000 as the fair value for the benchmark Nifty at the end of 2025. As the Nifty is already around those levels, BofA Securities expects no incremental returns for the rest of the years. In an emailed interviewed to Moneycontrol, Shah also spoke on what will move the market, the role retail investors will play, the headwinds and his sectoral picks. Here are the edited excerpts of the interview:

What is your assessment of the Indian market after the recent phase of correction and current stability?

We believe the Nifty is now fairly priced, while small and mid-cap stocks are overpriced. Markets are already pricing in potential benefits of an ongoing monetary stimulus, potential for some fiscal stimulus, likely conclusion of India-US trade deal, lower crude and a weaker USD. It is hard to justify what could drive further market upside.

On the other hand, we see emerging risks from global macro and geopolitical uncertainties, which could continue to be a source of market volatility.

Besides, India could see a re-acceleration of populism, as there are six state government elections scheduled over the next 12 months and the growth revival across capex, consumption and credit offtake is likely to be shallow in comparison to the street expectations in our view.

These risks when viewed in the context of the fact that valuations for the Nifty are now full, while valuations for the broader markets are rich, make us cautious on the markets for the rest of this calendar year.

The broader consensus is that double-digit returns may not be feasible in the near to medium term. Do you agree?

Our fair value for the Nifty is 25,000 by the end of CY25. Given the Nifty is already around those levels, we expect no incremental returns for the rest of CY25. With little scope for further valuation expansion, incremental returns over the medium term would have to be led by earnings growth.

Overall, with no returns likely for the rest of the seven months in CY25 and a likely 10-12 percent earnings growth-led returns thereafter, one should expect high single-digit returns CAGR over the medium term.

With domestic investors becoming a major force in the market, do you believe this is a sustainable trend?

Domestic investors have expanded by over five-fold from 37 million demat accounts in FY20 to over 192 million as of April 2025. Consequently, domestic mutual funds have seen over $220 billion of cumulative inflows, far outpacing foreign institutional inflows of just $20 billion, over this time period. With fixed income markets offering muted returns on the back of lower bond yields and changes in tax structure over the past two-three years taking away tax arbitrages for debt instruments, along with the deepening and broadening of the equity markets, we expect domestic investors continuing to a major force for Indian markets.

Over and above that, changes in investment mandates for endowment funds would ensure a steady flow into equities. That said, we believe market volatility could now make trend of domestic flows volatile now as opposed to a steady expansion in flows witnessed over the past few years. This is already reflected in domestic monthly flows trends: markets peaked in September 2024, domestic flows peaked in October 2024 at $8.6 billion, since then, domestic inflows have ranged between $4.5 billion and $6 billion a month.

There seems to be a growing view that India's GDP estimates could be revised downwards. What is your take?

We do anticipate modest downward revisions to India's GDP estimates, potentially in the range of 20 basis points on the back of trade wars, potential impact on consumer and business spends due to global economic uncertainties and government expenses now striking a balance between capex and consumption stimulus.

Where would you position India in the emerging markets landscape?

India continues to stand out as the fastest-growing large economy globally for the past four consecutive years, a trend we expect to continue.

Our analysis suggests India has delivered the second-best equity market returns in USD terms over the past three decades, after the US and has delivered highest number of stock compounders globally over the past decade.

We continue to see India as a structural growth story, led by a combination of long-term earnings growth, strong capital markets, robust regulatory ecosystem and deepening domestic savings.

What are the two most important factors supporting and working against India today?

On the positive side, government policies are constantly focused on improving macro-economic fundamentals led by fiscal consolidation and reduction in current account deficits, leading to falling bond yields and a stable currency, among other factors.

Besides, government policies are creating structural growth drivers that promotes formalisation of the economy, a robust digital public infrastructure, rapid expansion in physical and social infrastructure – these factors have the potential to drive large productivity gains and a robust economic multiplier, as it would create multi-year upcycles for capex, real estate and start-ups in our view.

Creating a robust manufacturing ecosystem that drives FDI and employment growth are issues that would require continued government focus and policy reforms.

What are the large structural changes in the Indian capital markets that you are betting on?

We see three structural drivers for Indian markets.

First, broadening of markets with new listings driven by new generation businesses as well as interesting companies that are yet unlisted.

Second, financialisation of household savings that should drive rising share of household savings in equities: India still has only around 9 percent of household financial assets in equities, compared to 30-35 percent for some developed markets.

Lastly, constantly improving regulations led by regulatory agility, investments in technology/modernisation and a stakeholders’ feedback-driven approach.

India has historically traded at a premium to peers. Do you expect this to continue even as China attempts a resurgence?

We believe India will continue to command a valuation premium over emerging markets justified by its superior growth, better and improving corporate governance standards, visibility for structural growth and proactive government policies. That said, India’s current valuation premium is almost double when compared to its long-term averages and needs to contract.

Which sectors do you find most attractive or concerning at present?

We believe the RBI would continue to stimulate growth through an accommodative monetary policy. As a result, we are constructive on domestic rate-sensitive cyclical sectors such as financials, autos, real estate, REITs and a few internet stocks.

We are also overweight on the defensive sectors such as telecom, hospitals, domestic focused pharma and select staples stocks.

Conversely, we are cautious on sectors exposed to the external world such as IT, energy, commodities as well as sectors exposed to the capex ecosystem such as industrials, metals, cement and commercial vehicles.

Do you see decarbonisation as a major capex driver for India?

Absolutely. We expect India to invest over $270 billion over the next five years, much higher than $216 billion it has already invested over the past 10 years. India is leading the world in terms of its decarbonisation targets and is likely to in fact exceed its commitments made in December 2015.