Brokerage firm ICICI Securities believes that cyclical, capital-intensive and value stocks may outperform in the calendar year 2023 (CY23) while the Nifty may clock a gain of about 11 percent by the end of the year.
"Our Nifty50 target for CY23-end stands at 20,000, implying an 11 percent upside, which is sub-par considering the long-term expected return of at least 12 percent from Indian equities. However, we expect themes related to corporate and government capex, real estate cycle, credit growth and pockets of discretionary consumption to outperform in CY23," said ICICI Securities.
The brokerage firm added that the US big tech selling is likely to end driven by the US Fed pivot and earnings yield approaching 5 percent, which will have a rub-off effect on the Indian IT and digital themes.
Stagflation - a situation of low growth and high inflation - is the key risk to equities in CY23 wherein inflation picks up again post the waning of favourable base effects while growth decelerates, said ICICI Securities.
Rich valuation of the market has emerged as a key risk for the market but the fresh correction last month has offered some comfort on the valuation front.
"After the December correction, the valuation of the market has scaled back from the high-optimism zone to marginally below 19 times P/E currently," said ICICI Securities.
The brokerage firm believes economic growth in the developed economies will most likely slow down in 2023 given the steep quantitative tightening (QT) cycle of CY22 by the US Federal Reserve.
However, inflation may recede sharply as it enters a significantly favourable base effect from Q1CY23 which could trigger a shift in the Fed stance. The brokerage firm believes the central bank will have adequate firepower to fight a recession in 2023.
"With a rising probability of a mild recession in the US and long-term inflation expectations dropping towards the two percent mark, the US Federal Reserve could pivot away from its current hawkish stance in CY23. Terminal rate of nearly 5 percent in CY23 and declining inflation trend implies adequate firepower to fight a recession unlike the pre-covid crisis in 2020 when the Fed fund’s rate hovered around 2.4 percent," said ICICI Securities.
The brokerage firm believes domestic demand to be driven by the recovery seen so far in corporate and government capex, credit growth, real estate cycle and policy initiatives towards boosting the manufacturing industry.
The brokerage firm highlighted that domestic investors earned positive returns on gold (up 14 percent), USD (up 11 percent), real estate (up 5-6 percent), Indian stocks NSE500 (up 3.5 percent) and bonds (up 2 percent) earned in 2022 while those betting on US big tech, IT or digital assets, emerging markets and developed market stocks had negative returns.
"Within equities, high-beta, capital-intensive and value stocks significantly outperformed low-volatility stocks," said ICICI Securities.
Disclaimer: The views and recommendations given in this article are those of the broking firm. These do not represent the views of MintGenie.