BofA Securities has revised its year-end Nifty target to 14,500 (from 16,000) with target multiple of 17x (close to 10-year average) from 18.4x, factoring in the near-term negative event horizon. The target implies a 7% downside potential from current levels, according to a report. For sensitivity, Nifty earnings growth moderation to 15% in FY23/24E could further drive down the target to 13,500, implying (-)14% potential returns, it added.
“Nifty valuation, though corrected, still appears vulnerable close to its 10-year average. We maintain a cautious stance with defensive sectoral skew & a revised year-end Nifty target of 14,500,” BofA Securities wrote in a note. While the Nifty now trades at 17x one-year forward consensus EPS (21x as on January 1, 2022), BofA believes that it could see further contraction, led by earnings cuts and the slowing global growth. The US potentially slipping into a recession is a key downside risk that could act as a negative trigger, the report said.
BofA has remained cautious on the Indian markets and has cited five reasons for its stance. These are: Fast tightening monetary conditions, slowing growth/fears of US recession, earnings cuts, prices of crude oil and valuations. According to the brokerage, most of the above negative events are either likely to play out over the next two-three months or more clarity will emerge on these fronts. Pricing in of these negatives could lead the markets to bottom by August-September, the report said.
Aided by strong domestic institutional investor inflows (~$24.3 billion year to date, compared with $26 billion FII outflow), Indian equities have outperformed their global peers. The Nifty is down 11% compared with a 23% fall in the S&P 500.
According to the BofA report, the Indian markets could witness a sharp correction if domestic equity inflows reverse, led by rising yields (debt/bonds could pose as an alternative investment option) or market correction-led redemption. “However, our analysis since 2000 suggests: (1) only a small negative correlation (-11%) between domestic equity outflows and debt inflows; (2) overlap of equity outflows and debt inflows is seen for only 23%-29% of monthly instances even when 10-year GSec yields were more than 8-9%…” the report said