The last one year's journey of Nifty has been a bumpy ride. Nifty hit its all-time high of 18,604.45 in October 2021 and touched its 52-week low of 15,183.40 in June 2022.
Nifty is about 4% down in the last one year due to multiple headwinds such as the Ukraine war, inflation, aggressive rate hikes and the fear of a global and longer spell of recession.
Overall, the road ahead for the market is hazy as the prevailing headwinds are expected to keep the bulls subdued.
However, the trends of the domestic economy are likely to give comfort. India is primarily a domestic-centric story, which is why many analysts and brokerage firms believe that the impact of a global recession may be limited to the Indian economy.
Nifty may remain even below 17k in 2022?
Despite all talks of decoupling and resilience of the Indian economy, expecting a healthy return from Nifty this year will be irrational.
We are already near mid-October and it is unlikely that the market will vault into the remaining two and a half months to give an impressive return.
On December 31, 2021, Nifty was at 17,354.05. Analysts expect the benchmark index to remain near or even below this level by the end of 2022. Crude oil prices, global cues, the rupee's weakness against the dollar and macroeconomic indicators will continue dictating the course of the market.
For the near term, the trajectory of crude oil prices will be a huge factor for the Indian market as the inflation rate, trade deficit, rupee exchange rate and forex reserves are linked to the oil prices.
"Nifty may remain around 16,500 to 17,500 by the end of 2022, depending on crude oil. If oil is back to $80 a barrel, Nifty could go to 17,500 or even to 18,000. If oil breaches $100 and moves above 110 a barrel, then the Nifty can fall to 16,500. If oil price moves significantly above $100 a barrel and stays there for a period of more than three to six months, it can impact the Indian economy and markets," said G Chokkalingam, Founder & Head of Research, Equinomics Research & Advisory Private Limited.
Can the Indian economy decouple?
The narrative of the decoupling of the Indian economy also looks far-stretched. As brokerage firm Kotak Securities pointed out the growing rhetoric of India decoupling from the rest of the world may not bear out.
"While India could fare well relatively, policy steps (and missteps) of developed markets will reflect in external (current account deficit/balance of payments/Indian rupee) and internal (inflation/fiscal) balances, which will be headwinds for domestic growth. India faces headwinds from imminent global demand and trade slowdown, risks of higher-for-longer global inflation and rates, dollar strengthening, and enduring geopolitical tensions. Over the medium term, the global macro scenario will see structural shifts from the past several decades," said Kotak Securities.
Domestic economic activities have seen a healthy uptick, but the recovery to the pre-Covid levels is still incomplete. So, India is unlikely to remain immune to the global slowdown.
"Global shocks propagate to the domestic economy through four key channels: (1) trade flows (2) commodity prices, (3) capital flows, and (4) financial sector. As global demand slows down, India is unlikely to be immune with the trade and capital channel being the key risks and determinants of India’s growth," said Kotak Securities.
Will the next year be better?
Headwinds persist but analysts and brokerages hope that the Indian market will clock healthy gains in the next one-month timeframe.
Brokerage firm Prabhudas Lilladher expects Nifty to hit 20,936 in the next one year (by September 2023).
"We continue to believe that structurally story led by (1) IT services with strong global demand, (2) expected gains from China+1 supply chain realignment in pharma, chemicals, textiles, etc., (3) rising visibility of capex across public infra ( ₹1,40,000 crore), PSU’s, PLI ( ₹22000 crore), defense, digitisation and data centres. We expect the current state of volatility to be temporary and recommend accumulating fundamentally strong stocks for medium to long-term gains," said Prabhudas Lilladher.
The brokerage firm estimates Nifty EPS (earnings per share) at 855.2 and 963.4 and introduces FY25 EPS at 1069.2, implying a growth of 12.1%, 12.7%, and 11% for FY23, FY24 and FY25, respectively.
"Our estimates are 3.5% and 5.6% and 8.3% lower than consensus EPS estimates. Nifty is currently trading at 19 times one year forward PE which is a 7.8% discount to a 10-year average of 20.5," Prabhudas Lilladher said.
The brokerage firm values Nifty at the last 10-year average PE (price-to-earnings ratio) of 20.5 times on September 2024 EPS of ₹1,016 and arrived at the September 2023 Nifty target of 20,936 (20,057 earlier).
In a bull case scenario, Prabhudas Lilladher values Nifty at a 10% premium to 10-year average PE (21.5 times) and assigns a target of 22,918, up from an earlier estimate of 22,063.
In a bear case scenario, the brokerage firm values Nifty at a 20% discount to the 10-year average and arrives at a target of 15,800, down from an earlier target of 16,046.
The US Fed and the RBI are expected to take a pause on the rate hikes in 2023 as inflation is expected to come down by then. If the Ukraine war ends in the coming few months and there are no other major geopolitical issues, the markets across the globe will start moving higher factoring in healthy economic growth.
Having said that, all these remain under the shroud of uncertainty. The Ukraine war, which started in February 2022, is still continuing and the end looks remote. Inflation is sticky, rate hikes are aggressive and the outlook of the economy is sombre. The road ahead looks tough and uncertain.
Disclaimer: The views and recommendations given in this article are those of individual analysts and broking firms. These do not represent the views of MintGenie.