Indian economy will take longer to recover from Covid-fuelled slump: JPMorgan

According to JPMorgan Chase & Co., the earnings optimism surrounding India's domestic-focused corporations may be misplaced because the economy may take longer to recover from a COVID-fuelled slump, Bloomberg reported.

Firms with a heavy reliance on local demand may face a slew of profit downgrades this year due to subdued consumption and wage growth, said Sanjay Mookim, JPMorgan’s head of research, India.

The warning comes as sell-side analysts estimate overall earnings per share for companies in the benchmark NSE Nifty50 Index to rise almost 17 per cent over the next 12 months.

The Nifty has lost 12 per cent since hitting a record in October as concerns about the US Federal Reserve’s rate hikes and high inflation have driven record outflows from local shares.

Also, the Reserve Bank of India, whose dovish policy has been a key catalyst for equities, is expected to tighten aggressively.

Mookim said wage growth has been the slowest in almost three decades, as companies look to protect margins amid rising price pressures.

He said the central bank may raise the policy rate to 6.15 per cent after a surprise hike this month to 4.4 per cent. Inflation has breached the 6 per cent upper limit of the central bank’s target range for four months.

In its base case, JPMorgan expects zero returns from the Nifty index in 2022. 

However, the Nifty is still faring much better than the MSCI Emerging Markets index, which has fallen by 16 per cent.

JPMorgan remains positive on banks as “this is the only sector where the growth-value combination makes sense”, said Mookim.

It is ‘neutral’ on staples and ‘underweight’ on the consumer discretionary sector.

Meanwhile, BofA Securities cut its Nifty target to 16,000 from 17,000 earlier, on the back of interest rate hikes in the US; inflation worries; and a recent off-cycle rate hike by the RBI.

The brokerage house also said in a negative scenario, the Nifty's valuation multiple can shrink to 15.8x (LTA) with its target at 13,700 points, implying a 15 per cent downside from current levels.

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