Receding Omicron worry, stabilising commodity prices and bond yields along with the possibility of scaling down of Russia-Ukraine crisis may bode well for equity valuations, said ICICI Securities in a note. The brokerage firm said that stabilising commodity prices and bond yields are setting a floor for equity valuations that seem troubled earlier this year as covid-19 cases rose and then Russia Ukraine conflict escalated. The brokerage firm has pinned a 19,000 target on Nifty 50 for March 2023. The set target would be an all-time high for the benchmark index. Nifty is currently hovering around 16,500, down from its current high of 18,604.
Fears receding now
Dalal Street started the year with a scale of Omicron variant of Covid-19, followed by the sudden escalation of the Russia-Ukraine conflict in March. “This impacted the ‘equity risk premium’ (reflected in the spike in VIX). It also resulted in a surge in commodity prices, especially crude oil, thereby triggering an inflation scare,” analysts wrote in the note. They added that the bond yields spiked later on, creating a double whammy for equity valuations, helped by the hawkish US Federal Reserve and RBI.
The worries mentioned above are now looking to cool down as commodity prices and bond yields have started to stabilise while omicron is receding. “Also, the Russia-Ukraine conflict will likely be scaled down from global nuclear brinkmanship to a local conflict. Dip in the latest PCE inflation data for the US, general cooling down of commodity prices and the expected increase in oil output by OPEC+ will likely add credence to the peak inflation argument,” ICICI Securities said.
Valuations in comfortable zone
“The above trends are visible in the fear index (VIX) receding and will most likely put a floor on equity valuations on a 1-year forward P/E basis, which fell from around 23x in Oct’21 to less than 18x during the May’22 sell-off,” analysts said. They added that high-frequency indicators so far appear robust and indicate that an economic recovery is on course. PMI hit an 11-year high last month while core sector growth for April 2022 was at 8.44% on year and non-food credit growth for May stands at 11.2% on year.
“Q1FY23 is the first quarter of no covid restriction on movement since the onset of the pandemic in 2019. High-frequency indicators for the quarter so far indicate robust economic recovery, which should gather momentum going forward,” analysts said.
Top stock picks
Among stocks, analysts at ICICI Securities said they are overweight on stocks driven by investment rate, savings rate, credit growth, exports, and pent-up discretionary consumption. State Bank of India (SBI), Axis Bank, HDFC Bank, Aditya Birla Capital, SBI Life, Larsen & Toubro, NTPC, NHPC, GAIL, Oil India, Coal India, UltraTech Cement, Bharti Airtel, Tata Communications, Gujarat Fluorochemicals, Phoenix Mills, Brigade Enterprises, Greenpanel Industries, Indian Hotels, Jubilant Foodworks, Metro Brands, Sapphire Foods, Inox Leisure, TVS Motors, and Eicher Motors are their stock picks.