Nifty to hit 20,000 points in 2023, driven by FII flows, says BofA Securities

The Nifty 50 stock index may gain as much as 5.9 percent from its current 52-week high and touch 20,000 next year, driven by inflows from foreign institutional investors, BofA Securities said.

“Based on how macro things play out, we expect the Nifty to trade in a range from 17,000 to 20,000,” BofA Securities said. The brokerage said the bear target for the Nifty 50 for 2023 is 17,000 because valuations are hefty and earnings downgrades are likely, while FII inflows could drive the Nifty to hit the bull target of 20,000.

The base case for 2022-end is 19,500. The 52-week high for the index is 18,887.60.

The global brokerage said the Nifty is trading at 20.7 times and a long-term average of 18.8 times basis bottom-up weighted average of one-year forward earnings of the current index constituents.

The MSCI India valuation premium to emerging markets (EM) at 98 percent remains elevated as compared to the long-term average of 45 percent, it added. But BofA Securities said a revival in China’s economic growth or policies could help shrink this premium.

When valuations are higher, the probability of markets delivering an outsized return is lower, BofA Securities said.

Considering that India has always delivered better returns than the S&P 500 despite the possibility of a recession in the US, Amish Shah, a research analyst at BofA Securities India, recommends buying on dips. Besides, Shah said large caps will outperform the mid- and small-caps in 2023 as investors flock to safety amid volatility.

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Earnings cuts

BofA Securities said an earnings cut is likely for the automobile sector, which, at 79 percent, would be the highest. Other external-facing sectors such as healthcare face an earnings cut of 19 percent and information technology 14 percent. It said expectations for communication services and discretionary are lofty.

“On the backdrop of slowing global growth, we see material downgrades to the consensus numbers,” the brokerage firm said in its investor presentation.

Equity inflows

On inflows, the brokerage said India and China don’t compete for allocation in the EM basket and instead they are directionally linked. Foreign portfolio investor inflows into the EM basket would imply inflows to India, it added.

“Our analysis indicates, even on the conservative side, EPFO (Employees Provident Fund Organisation), NPS (National Pension System), and SIPs (systematic investment plans) could contribute around $20 billion of flows into India’s equities,” it said in the investor presentation.

BofA Securities said that since the peak in October 2021, FIIs have largely been net sellers by withdrawing $28 billion. FII ownership of Indian equities is at a multi-year low of 18 percent compared to 23 percent in 2019, it added.

The financialisation of savings is also expected to support Indian equities. The brokerage explained that a higher proportion of savings is being allocated in favour of equities and small savings, which is a move away from deposits.

Shah’s view is that India will outperform developed market equities but underperform emerging markets next year.

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Pockets of Opportunities

BofA Securities said it remains overweight on sectors with earnings visibility, near-average valuations, and lower positioning of FIIs/domestic institutional investors as against their historical averages.

Financials, industrials and metals could see upcycles and are now trading at or below their average valuations. Shah’s preference goes from private and public sector undertaking banks, to insurance companies to nonbanking financiers, given the decent loan growth momentum.

IT, materials, energy and consumer discretionary are now trading at expensive valuations and may see a reversal in cycle, according to BofA Securities.

For fast-moving consumer goods companies, the brokerage firm said softening inflation and a favourable base could mean growth revival in the rural segment.

Shah is bullish on cement, steel and infrastructure as he sees good demand visibility. Additionally, he said there will be subsidies in the budget for rural infrastructure schemes such as the Pradhan Mantri Awas Yojana, which provides affordable housing for the urban poor. He added that one could move out of the cement sector after six months if the stocks perform well.

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