Hit hard by monetary policy tightening and macro headwinds, Nifty may soon find itself in a bear’s grip if BofA Securities’ year-end target of 14,500 is considered. The global brokerage says it is cautious about the stock market despite the recent correction and believes that the index may hit bottom in the next 2-3 months.
In addition to globally tightening monetary conditions and a slowing economic outlook, including fears of a recession in the US, other risks to the market include likely earnings cut for Nifty in 2Q/3Q FY23 as effects of cheaper inventory buffers fade and headwinds from higher crude. “Nifty valuation, though corrected, still appears vulnerable close to its 10-year average,” BofA said in a note to investors.
5 factors that make BofA adopt cautious stance:
1) Fed fear: BofA economists see another 125 bps rate hike by September. “Tightening liquidity is negative for equity markets. G4 central bank balance sheets have a correlation of 0.97 with global equities (0.95 for G3 balance sheets with Indian equities). Estimated $3.2 trillion contraction in G4 balance sheets by December 2023 is hence expected to drive equity underperformance,” it said.
2) Recession fears: BofA economists recently slashed the CY22 global GDP growth forecast by 100bps to 3.2 per cent, with risks firmly skewed to the downside. They see US GDP growth slowing to 2.3 per cent in CY22 and 1.4% in CY23, with a 40 per cent chance of recession.
3) Earnings cuts: BofA analysts see scope for further downgrades in Nifty earnings. “15 per cent earnings growth could seem reasonable. Given cheaper inventory buffers largely mitigated the margin impact of high commodity prices in 4QFY22, we see some of these EPS cuts coming through in 1Q/2Q FY23,” it said.
4) Crude pain: Brent crude has averaged US$104/bbl YTD and BofA’s commodities team sees no relief in the near term with a forecast of $105/bbl in 2H22. While global oil demand is slowing, a spike to $150/bbl remains a possibility if European sanctions push Russian oil output
5) Valuations: Nifty now trades at 17x 1-yr fwd. consensus EPS (21x on 1st Jan ’22), or close to its 10-year average. The brokerage said it could see further contraction led by earnings cuts and slowing global growth. A recession in the US can also act as a negative trigger.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
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