After a muted 2022 and a volatile start to 2023, Indian markets have seen some recovery since last month (April). The benchmark Nifty is now just 3 percent away from its peak on the back of improving macros, moderating inflation, decent March quarter earnings, etc. However, the US recession remains a concern, which brokerage house Bank of America (BofA) Securities believes is 'imminent'.
In a recent note, BofA Securities informed that Nifty has usually performed well — both ahead of and after a recession. However, it pointed out that 2001 and 2007 were the only years when the Nifty witnessed a sharp decline due to the recession.
“Our analysis of the past two recessions (2001 and 2007) suggests the S&P 500 falls 20–40 percent after the onset of recession. The Nifty50 mimics S&P, although it falls less,” it observes.
As per the brokerage, with markets currently near their peaks, there is room for correction with the onset of a recession in the US.
"With the US recession imminent, given the fall of its regional lender First Republic Bank, the country’s debt ceiling risks, and the Fed’s ongoing credit tightening, one should look to book profits," said the brokerage.
The brokerage observed that the past indicated a 15-30 percent fall in Nifty post recession. In the 2001 recession, Nifty fell 15 percent ahead of the recession, 27 percent during and rose 4 percent post recession, analysed BofA. Meanwhile, in 2007, Nifty rose 41 percent ahead of the recession, fell 15 percent during, then again jumped 24 percent post the recession, it added.
The brokerage also noted that currently, the Street is expecting the Nifty earnings to grow 17 percent in 2023-24 and 16 percent in 2024-25, however, BofA sees a sharp downward revision to these growth estimates due to headwinds such as global slowdown, delayed rural revival, volatile commodities posing a risk to margin revival, and an imminent US recession.
According to BofA, the earnings estimates for Indian Inc could be slashed by around 40 percent this fiscal year and next due to the aforementioned global and domestic risks.
Consensus estimates for Nifty50 companies are lofty and haven’t moderated despite a weak outlook for software firms, it stated.
It sees estimates for 2024 and 2025 declining to 11 percent and 9 percent, respectively, from 17 percent and 16 percent as the March quarter earnings season gets underway.
"Demand in India’s urban areas is expected to peak and revival in rural parts remains slow. Weakening global growth and volatile commodities add to the bleak outlook for corporate earnings," it explained.
BofA further said that it sees no upside to Nifty year-end target of 18,000 and would look to book profits. Earlier, it had suggested buying on dips after the benchmark Nifty index slipped below 17,000.