BofA Securities is getting more and more bearish on the Indian market every passing day. In the third instance in 2022 so far, it slashed its Nifty year-end target to 14,500 from 16,000 it estimated a month back as it sees the near-term risks skewed to the downside. It also predicts the market to bottom around August.
The earlier projection was revised down from 17,000. This was again a cut from its February estimate of 19,100.
“We cut our year-end Nifty target… With target multiple of 17 times (close to 10-year average) from 18.4 times, factoring in the near- term negative event horizon. Our target implies 7 percent downside potential from the current levels,” said the brokerage house.
In the downside scenario, it sees the Nifty falling 14 percent from here, to 13,500.
"We are cautious on markets despite the recent market correction," said Amish Shah of the BofA Securities. In addition to globally tightening monetary conditions and a slowing economic outlook, including fears of a recession in the US, he sees likely earnings cut for the Nifty in Q2/Q3 FY23 as effects of cheaper inventory buffers fade and headwinds from higher crude sustain.
BofA Securities said it maintains a defensive strategy skew as it further raises overweight stance on staples, healthcare and utilities. “We move energy to overweight (from underweight) on sustaining higher energy prices. While remaining overweight on select domestic cyclicals (industrials, financials and autos), we marginally trim our overweight skew on financials, given that while the sector earnings visibility remains strong,” it said.
“Bankex exhibits strong correlation with the US bank index performance and hence could see some headwinds from negative sentiments on fears of a US recession.”
In the last couple of quarters, India’s earnings have seen upgrades, but the trend will likely reverse, and faster than you can notice. BofA Securities see ample scope for downgrades now. It finds 15 percent earnings growth “reasonable” for FY23, compared to current consensus growth estimates of 24 percent.
“Corporate commentary across sectors at our India Field Trip last week was positive on the demand/ growth outlook. However, we see the risk of moderating outlook/growth slowing,” Shah said.
He also pointed out that crude has the possibility to hit $150 a barrel if European sanctions push Russian oil output below 9 million barrels a day, though the average price for the second half of FY22 will likely be around $105 per barrel.
Market to bottom around August
The biggest question for the market has been when the market will bottom out. The foreign broker believes the market is likely to find its bottom around August-September as it sees most of the negative events to play out in the next two-three months.
The events or cycles that the market can see are policy rate hikes and monetary tightening, any negative impact of the same on the economy, and if the inflation plateaus or not.One upside risk that Shah sees is continuous domestic flows, aided by SIPs. This is in contrast to investor concerns that there is a potential for a sharp correction of Indian markets if domestic equity inflows reverse, led by rising yields or market correction-led redemptions.