BofA Predicts Nifty Earnings To Be Hit By Economic Slump, Maintains 18,000 Target: Report

BofA says factors include the impact of the global economic slowdown, specifically on the IT sector, potential delays in rural revival, and the possibility of a peak in urban demand could hit Nifty

The global brokerage firm expects flattish returns for 2023 and has kept its Nifty target unchanged at 18,000.

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Global brokerage firm BofA has said that risks to earnings growth are apparent in the market movements. According to a Moneycontrol report, the brokerage major said that these risks include the impact of the global economic slowdown, specifically on the IT sector, potential delays in rural revival, and the possibility of a peak in urban demand. 

BofA said that these factors can cause further reductions to the consensus estimates for Nifty's earnings growth for the FY24 and FY25, which currently stand at 17 per cent and 16 per cent, respectively, could be reduced by as much as 40 per cent.

The global brokerage firm expects flattish returns for 2023 and has kept its Nifty target unchanged at 18,000, the report said. 

It also recommended that investors should consider taking profits and buying on potential market dips, particularly if the Nifty falls to 16,000 - an 11 per cent decrease. BofA expects this due to strong domestic investments, unfavorable FII positioning, and India's robust macroeconomic performance, the report added. 

According to BofA, the IT sector remains at the top of its list of underweight sectors. It also recommends being underweight on staples, discretionary, and telecom sectors, while favouring financial, industrials, cement, steel, select auto (two-wheelers), utilities, and healthcare sectors as defensive plays. BofA considers the energy sector to be of normal weight, the report said. 

BofA observes that Nifty valuations are expensive, with a one-year forward P/E of 19.5x. The brokerage firm predicts that Nifty's earnings growth for FY24/25 will normalise to 11 per cent and 9 per cent, respectively. This would result in even more expensive valuations compared to other emerging markets and debt.

BofA warns that the recent decline in First Republic Bank, combined with the approaching debt ceiling deadline in June, credit tightening, and commercial real estate weakness, could be early indicators of an upcoming recession in the US.

BofA's analysis of the past two recessions in 2001 and 2007 suggests that the S&P 500 could potentially plummet by 20-40 per cent once the recession takes hold. Although the Nifty typically follows the S&P, it has historically experienced less severe drops, the report said.

During a recession, stocks typically experience their worst phase due to tightened credit and reduced liquidity. If the US falls into a recession, India's GDP growth could contract by 190bps, with export growth dropping sharply from double digits to low single digits, based on past instances, as per a BofA.

BofA predicts that if the Fed fails to meet market expectations of a rate cut in September, it could negatively affect the markets in the second half of this year. The report suggests a rate cut is more likely in March.

During a US recession, India typically experiences a shorter economic contraction period and recovers faster than the US. Indian markets have historically provided higher returns than the US in the 12 months after a US recession, the report said. 

BofA estimates strong domestic passive flows of over $20 billion from EPFO, NPS, ULIPs, and SIPs, with large-cap stocks accounting for about 75 per cent of these flows, and advises investors to switch from large-cap stocks to mid/small-cap stocks.

BofA notes that selling by foreign institutional investors (FII) will moderate because of low FII positioning in India and its strong macroeconomic fundamentals. India's overweight position in EM funds hit a multi-year low of 0.21 per cent in March 2023, compared to 1.2 per cent in January 2015, and FII ownership of the NSE500 Index declined to 19.2 per cent in March 2023 from 23 per cent in December 2019.