Global brokerage BofA Securities expects Nifty to increase further to 20,500 by December 2023 after its US economics team recently modified their perspective from one of a 'mild recession' to one of 'no recession' in the US. The Nifty target is 14% higher than the May prediction of 18,000.
BofA Securities expects Nifty to gain further to 20,500 as historically, Nifty's returns have mostly been positive at least three months prior to the end of US recession as well as during the phase of the Fed’s penultimate rate hike to six months after the start of rate cuts (current phase).
According to BofA, other reasons why Nifty could rally towards 20,500 could be that domestic inflows could continue to be robust, and "a third of Nifty market cap still below long-term average valuations: few of which offers buying opportunity,” said BofA in a note to investors.
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Any unexpected setbacks to the US economy, fiscal policies, or monetary tightening could exert downward pressure on the Indian share market. The forthcoming busy election schedule, too, is a risk to monitor, said BofA. Given these considerations, it prefers largecaps.
According to analysts at BofA Securities, valuations for small and medium-caps appear to be elevated, while estimates for earnings growth appear to be stretched. The brokerage expects a short-term downturn due to the risks arising from the recent surge in crude prices, inflationary pressures, and the upward trajectory of commodity prices driven by potential stimulus measures in China.
A contraction in the Nifty's valuations could trigger substantial active inflows from domestic institutional investors, thereby curbing the potential downside, BofA said. The brokerage is cautious about Nifty's earnings growth, projecting lower figures for FY24 and FY25 (13% and 11%, respectively) against the 17% consensus.
BofA Securities advises investors to avoid sectors prone to earnings downgrades, especially those reliant on margin expansion due to rising commodity prices. Sectors that recently rallied due to valuation increases, rather than earnings improvements, should also be approached carefully, it said.
BofA is cautious about IT, certain parts of the auto and discretionary sectors, metals, cement, telecom, utilities, and materials. The recommendations reflect its evaluation of risks associated with these sectors based on the risks mentioned earlier. It downgraded cement and utilities to "underweight" due to potential earnings risks from costs and regulations.
BofA maintains the “overweight” stance on financials due to attractive valuations and limited earnings risks. It is also “overweight” on industrials due to strong capital expenditure and real estate trends. In the automobile sector, passenger and commercial vehicles are projected to grow and also improve margins.
Healthcare remains promising due to favourable pricing in the US and robust specialty business in India. BofA has upgraded staples to “overweight" on rural recovery indicators, shifted consumer discretionary to "neutral".
Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Business Today. Investors should consult their financial advisors before taking any position.