Reiterating a cautious outlook on the market, Amish Shah, Head of India Research at Bank of America Securities, expects the Nifty to deliver only single-digit returns in 2025—comparable to fixed-income returns. He remains particularly wary of the broader market, arguing that mid and small-cap stocks are still overvalued despite recent corrections. He predicts the possibility of further correction in this segment of the market, with returns potentially lower or negative compared to large-cap counterparts.
The caution with regards to the broader market that has been voiced by several market experts recently can be directly connected to the performance of small and midcaps in recent times. After witnessing a bull run in the past two years, the small and midcaps have hit the brakes on and off in the past six months.
The selloff in this market segment has especially intensified in the past two months, with both the small as well as midcap indices slipping into the bear territory with their 20 percent crash from record highs.
Several market experts have including Shah, have pointed the blame for expectations of muted returns on India's valuation problems. "India is currently in a cyclical downcycle or growth moderation phase. This makes it difficult to justify valuations above long-term averages, even after recent market corrections," he said in an exclusive interaction with CNBC-TV18.
Shah further pointed that despite the recent leg of correction, the Nifty continues to trade at a 4 percent premium over its long-term average. "Ideally, that premium should come down to zero. So, from a valuation standpoint, there's a potential downside of 4 percent, and with earnings compounding at 10-12 percent this year, we get the single-digit return expectation," he added.
Further strengthening his cautious view, Shah noted that Foreign Institutional Investor (FII) flows are likely to remain weak. "With the US 10-year bond yield hovering around 4.5-4.6 percent, the hurdle rate for emerging markets like India is approximately 15 percent," he said. Given that the broader market is unlikely to deliver 15 percent returns, Shah believes FIIs will opt for US treasuries or equities over Indian assets.
Sector-specific picks
Back in August, BoFA Securities downgraded 13 out of 14 industrial stocks that it covers, moving them from 'buy' to 'sell'. Despite the correction, the firm upgraded only one stock to 'neutral', leaving the sector with one 'buy', one 'neutral', and 12 'sell' calls.
However, even after six months, Shah has not turned bullish on the sector as he expects more correction to come by. Explaining his rationale, Shah said that from FY21 to FY24, during the capex upcycle, the industry saw 20 percent order flow growth, leading to 20–30 percent earnings growth as margins and working capital cycles improved.
In contrast, with capex growth moderating to 13 percent now, earnings growth will likely fall to mid-teens, requiring both earnings cuts and valuation adjustments. "While a significant part of the correction has happened, we’re not there yet. We remain bearish on capex-related sectors, including cement, steel, energy, and power utilities," he added.
On the flipside, Shah holds a bullish outlook on rate-sensitive sectors like autos, real estate, select internet names, and some financials. "Given our cautious market outlook, we also have defensive positions in healthcare and telecom," he said.
He is especially positive on healthcare, thanks to the sector's defensive nature. "Demand is inelastic, supply chains are hard to shift, and valuations are not excessive. We see both cyclical and structural opportunities—generics and hospitals, respectively—making healthcare an overweight in our portfolio," he explained.
In addition to that, Shah remains selectively positive on jewellry, travel and tourism, and cigarettes, along with some staple names. However, he is still not bullish on the entire consumption basket.
While the government’s $12 billion (Rs 1 lakh crore) tax stimulus is a positive, it represents only 30 basis points of GDP and remains less than 1 percent of India’s retail market. "So, while it helps, it won’t drive broad-based growth," Shah believes.
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