scorecardresearch5 reasons why BofA Securities cut Nifty target to 14,500; Prefers a defensive strategy

5 reasons why BofA Securities cut Nifty target to 14,500; Prefers a defensive strategy

Updated: 27 Jun 2022, 12:54 PM IST
TL;DR.
Amid the current environment, BofA maintains a defensive strategy skew, and further raised its overweight stance on Staples, Healthcare and Utilities. It also moved Energy to overweight (from underweight) on sustaining higher energy prices.
Amid the current environment, BofA maintains a defensive strategy skew, and further raised its overweight stance on Staples, Healthcare and Utilities. It also moved Energy to overweight (from underweight) on sustaining higher energy prices.

Amid the current environment, BofA maintains a defensive strategy skew, and further raised its overweight stance on Staples, Healthcare and Utilities. It also moved Energy to overweight (from underweight) on sustaining higher energy prices.

After an 8.5 percent decline in Indian markets in 2022 so far, global brokerage Bank of America (BofA) Securities reduced its year-end target for Nifty50 to 14,500 from 16,000 earlier factoring in the near-term negative event horizon. The brokerage maintains a cautious stance on Indian equities with defensive sectoral skew. It added that the potential clarity on macro and monetary policy outlook in the US/India could lead markets to bottom by August-September 2022.

In addition to globally tightening monetary conditions and a slowing economic outlook, including fears of a recession in the US, other risks that lead to BofA's cautious stance include: (1) likely earnings cut for Nifty in Q2/Q3 FY23 as effects of cheaper inventory buffers fade; (2) headwinds from higher crude likely sustaining; (3) Nifty valuation, though corrected, still appears vulnerable close to its 10-year average.

"Our target implies a 7 percent downside potential from current levels. For sensitivity, Nifty earnings growth moderation to 15 percent in FY23/24E could further drive down our target to 13.5k, implying -14 percent potential returns," it said in its report.

Strategy

Amid the current environment, BofA maintains a defensive strategy skew, and further raised its overweight stance on Staples, Healthcare and Utilities. It also moved Energy to overweight (from underweight) on sustaining higher energy prices.

While remaining overweight on select domestic cyclicals (Industrials, Fin, Autos), BofA marginally trimmed its overweight call on Financials, given that while sector earnings visibility remains strong, Bankex exhibits a strong correlation with US bank index performance and hence could see some headwinds from negative sentiments on fears of a US recession, it noted. It further said that it sees limited risks for the capex upcycle thesis on strong government intentions and limited historical inverse co-relation with rates cycle.

However, it is neutral on IT (strong earnings/ USD tailwinds, though valuation risks); underweight on Communication Services (5G auction overhang), high beta discretionary (growth slowdown/ valuation concerns) & materials (de-rating on pricing pullbacks), added the brokerage.

Now let's take a look at the reasons behind BofA's cautious stance on Indian equities:

Fast tightening monetary conditions: As per the brokerage, the US Fed has hiked rates by 150 bps since March and its economists see another 125 bps by September. It further noted that 26 out of 34 global central banks are in tightening mode and this will increase once the ECB starts to hike. Tightening liquidity is negative for equity markets, it added. BofA further noted that an estimated $3.2 trillion contraction in G4 balance sheets by December 2023 is expected to drive equity underperformance.

Slowing growth/fears of US recession: BofA economists recently slashed the CY22 global GDP growth forecast by 100 bps to 3.2 percent, with risks firmly skewed to the downside. They see US GDP growth slowing to 2.3 percent in CY22 (vs an earlier estimate of 4 percent) and 1.4 percent in CY23 (2.2 percent earlier), with a 40 percent chance of recession.

Earnings cuts: Despite several negative shocks, consensus estimates for Nifty earnings for FY23/24 have been raised by 4 percent since January and 24 percent/15 percent growth in FY23/24. BofA estimates remain 4 percent lower for FY23 and it sees scope for further downgrades. Given cheaper inventory buffers largely mitigated the margin impact of high commodity prices in 4QFY22, the brokerage estimates some of these EPS cuts coming through in 1Q/2Q FY23. Corporate commentary across sectors remains positive on the demand/growth outlook, however, BofA sees a risk of moderating outlook and growth slowing.

Crude: Brent crude has averaged $104/bbl YTD and BofA's Commodities team sees no relief near term with a forecast of $105/bbl average in the second half of 2022. While global oil demand is slowing, a spike to $150/bbl remains a possibility if European sanctions push Russian oil output, it said, adding that China's re-opening could also push up crude demand.

Valuations: While Nifty now trades at 17x 1-yr fwd. consensus EPS (21x on 1st Jan '22), or close to its 10-year average, it could see further contraction led by earnings cuts, slowing global growth, said BofA. The US potentially slipping into a recession is a key downside risk/ could act as a negative trigger, added the brokerage.

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First Published: 27 Jun 2022, 12:54 PM IST