Domestic brokerage house Ambit Capital sees the benchmark Nifty at 19,600 levels by December 2023, indicating an upside of around 10 percent from the current levels.
Despite the potential for 10 percent upside, the brokerage isn't bullish on the Indian market for the near term. It sees the fault lines emerging.
"DII flows but, more importantly, net SIP is moderating given rising deposit rates and tepid MF returns. We don’t expect hurried FII selling, but receding global liquidity and China reopening given punchy valuations will impact. The only saving grace is India’s earnings (thanks to banks), which have not seen significant cuts," explained the brokerage.
Ambit forecasts Nifty Dec-23 EPS estimate at ₹920 and a 10-year G-sec yield at 7.3 percent for the given target to be sustainable. “The upside to our target is possible if yields sustain at lower levels or Dec-23 earnings are higher than expectations,” it said.
Here's why the brokerage is not bullish on the Indian market for near term:
1) Return of polarization: As liquidity receded, polarization made a comeback in the second half of 2022 and Ambit expects it to accelerate in the current year. The broader market participation in the rally is over. The recent rally has been relatively narrow, with only a select few stocks driving the market. This is on expected lines as liquidity drains out and the divergence becomes clearer, highlighted Ambit.
It expects performance polarization in favour of heavyweights (top 15 stocks by weight) over small weights in Nifty led by stronger earnings. Largecaps are set to outperform smallcap and midcaps as earnings downgrades accelerate. It sees India’s outperformance with respect to emerging markets (EMs) continuing but moderating from CY22.
2) Fault lines emerge but earnings resilient: The brokerage pointed out that the moderation in DII flows was anticipated due to rising deposit rates and declining market returns, and it did manifest. "With FII ownership one of the lowest in the decade, we don’t subscribe to “Long China, Short India” trade, especially when historical evidence doesn’t exist and earnings remain resilient driven by banks. However, FII flows can moderate scattering across EMs as China reopens. Rural consumption remains subdued, while global liquidity would be negatively impacted with Bank of Japan and European Central Bank action," it said.
BoJ has finally turned by tweaking its yield curve control policy, allowing yield on the 10-year government bonds to rise further aiming to cushion the effects of protracted monetary stimulus measures. At the end of Sep’22, BoJ owned 50.3 percent of outstanding government bonds amounting to 536 trillion yen. The ECB has also announced a reduction in the asset purchase portfolio by 15bn euro starting Mar’22, which has already begun to manifest in yield hardening across Euro, especially in weaker economies like Italy and Greece.
3) Divergence between urban and rural consumption: Multiple high-frequency indicators suggest India’s consumption is currently witnessing a diverging trend between the urban formal sector and the predominantly informal-rural economy. Currently, rural India is facing a double whammy – a lack of non-farm jobs and elevated inflation, said Ambit. Low growth in nominal wages coupled with elevated inflation would continue to keep the purchasing power of rural Indians suppressed, predicted the brokerage.
Themes likely to play out
Value outperformance: According to Ambit, since Mar’20, the value factor (low P/E) has outperformed growth (high P/E) as well as the market and this trend has held strong in CY22 too. A part of this can be explained by the duration of the value and growth of stocks. Since a significant portion of the inherent value of growth stocks is dependent on future cash flows, the duration is higher and as such in a rising interest rate environment the brokerage expects growth stocks to underperform.
Cautious on mid- and small-caps: "We define the greed vs fear indicator by Nifty 100 value participation, which is at the lowest level since May’18. If Nifty 100 value participation is high, it indicates fear is dominating the market and activity is higher in large-caps and vice-versa. When fear becomes excessive, markets rally over the next 1 year, and small-caps and mid-caps outperform Nifty, and vice-versa. The greed vs. fear indicator has been significantly lower in 2HCY22, indicating the likelihood of mid-cap and small-cap underperformance over the next 12 months. Our relative preference remains large-cap> mid-cap> small-cap," explained Ambit.
The brokerage stated that while it remains overweight on banks, it recommends taking off some weight as valuations aren’t as cheap and book yield. The bond yield differential model suggests muted 1-year returns though earnings remain resilient, it mentioned. It also recommends reducing ‘underweight’ in IT to ‘neutral’, with likely mean reversion as earnings downgrades pause and relative valuation turns reasonable.
It is also ‘overweight’ on metals and OMCs while ‘underweight’ on FMCG, auto, and capital goods.
In its model portfolio, it has included HDFC Bank, SBI Life, BPCL, HPCL, Hindalco, TCS, and Nifty Bank.
Meanwhile, it has excluded ICICI General Insurance, HDFC Life, SBI Cards, IGL, TVS Motor, Ashok Leyland, Oil India, and Lauras Labs.