If geopolitical tensions between Russia and Ukraine worsen, Nifty could end 2022 at 14,000, Bank of America (BofA) Securities said in a new report. However, in case of no further escalation between the two countries, it maintained its earlier Nifty December 2022 target of 17,000. Both the target implies a downside for Nifty, which is currently trading above 17,200 levels.
"Worsening of the Russia-Ukraine conflict and continued sanctions on Russia could see the Nifty at 14,000 by the end of the year, with a completely defensive skew," it said. BofA added that it believes the presence of buffers will prevent any large macro deterioration.
While the index target has no upside, the brokerage noted that sector rotation could drive larger returns.
Global markets have been very volatile in the last few weeks amid the Russia-Ukraine and the resulting surge in global commodity prices. Indian markets have also fallen around 10 percent from their 52-week high, hit in October 2021 on inflation concerns and cautious growth outlook amid surging commodity prices. It also revised the FY23 GDP growth estimate only marginally down to 7.9 percent from 8.2 percent earlier.
Further, the continuous selling by foreign investors has also added to the pressure. However, BofA noted that in the case of macro buffers outflows from foreign investors could stop or possibly reverse and the focus could come back to India's growth prospects.
In March till date, the foreign investors have sold Indian equities worth ₹42,621 crore, which is higher than their total outflow in February ( ₹35,592 crore. Just in 2022, the foreign investors have sold Indian equities worth ₹1.11 lakh crore.
It remains overweight on Financials and Industrials - sectors which saw maximum trimming of weights by FIIs since October 2021 peak.
"Large banks could see EPS upside on gradual rate hikes/ inflation, while capex upcycle thesis would also remain intact on the fiscal impact of higher crude getting absorbed through multiple levers," BofA stated
However, it has downgraded consumer staples to underweight and changed stance on healthcare and autos to overweight.
In a scenario where geopolitical events worsen and crude averages $130 per barrel in 2022, India's gross domestic product growth may fall to 7.5 percent and CAD to 3 percent of the GDP, said the brokerage.
"A combination of worsening macro, curtailed fiscal room blocking capex push, corporate margin deterioration and impact on consumer wallets/ discretionary spends could mean elevated earnings risk, potentially dragging Nifty PAT growth to 10-15 percent range vs 22 percent current estimate," noted BofA.
In that case, it would be overweight on IT, utilities, healthcare and telecom along with energy/metals, while being underweight or bearish on financials and industrials, and discretionary stocks.