Bank of America Securities has cut Nifty50's target by 2,100 points for December 2022 to 17,000 from 19,100 earlier on expectations of a fast rate hiking cycle by the US Federal Reserve. It expects US Fed to hike rates by 100 bps and 175 bps in FY22 and FY23, respectively.
While Fed/RBI hiking cycles since 1994, suggests market valuations could contract, BofA added that it also suggests that market downsides are blunted if supported by robust earnings growth. India is well placed and is supported by 'growth-focused' fiscal/monetary policies, noted the brokerage.
BofA's current Nifty target is just about 2 percent higher than the index's closing level of 17,352.45 on February 15, 2022.
"With market breadth likely to narrow, we raise defensive skew marginally but remain constructive on domestic cyclicals," the report stated. The brokerage upgraded healthcare and staples and downgraded ratings on auto and IT to underweight. It remains overweight on industrials and financials.
Rate hike
BofA's US economists are now expecting seven rate hikes in the calendar year 2022 (CY22), starting March, and a further four hikes in the calendar year 2023, of 25 basis points (bps) each. Also, there are concerns around a potential 50 bps hike in March, 100 bps by July, and inter-meeting hikes, among others.
Within India, it expects the Reserve Bank of India (RBI) to hike by 100 bps by March 2023, said the note
Valuation analysis
BofA's analysis of four FED/RBI hike cycles since 1994, suggests market valuation contracts if valuations are above long-term averages before the start of the hike cycle. Given current market valuations are close, it believes that the valuation contraction is likely.
However, the note added that there have been instances of Indian markets delivering positive returns even during rate hikes by the RBI or the Fed, driven by earnings growth, even as valuations contracted.
Robust earnings, supportive policies to cap market fall
"We believe India's corporate earnings could structurally outpace nominal gross domestic product (GDP) growth, led by the start of multi-year capital expenditure (capex)/credit growth/start-up cycles and 'growth-focused' fiscal and monetary policies," the note said. India's CY22 earnings are likely the best among emerging markets, it added.
"A strong outlook is reflected in our macro analysts maintaining their views of 8.2 percent real GDP growth in 2022-23," BofA forecasted.
However, it added that political stability is a crucial risk, the market's breadth could narrow, and volatility could rise further.
Stocks
The brokerage has 'buy' calls on HDFC Bank, ICICI Bank, SBI, Kotak Bank and Axis Bank among banking stocks; HDFC, Shriram Transport Finance, LIC Housing and Mahindra Finance among housing finance companies; L&T, Adani Ports, Siemens, BEL, and Cummins among Industrials and on NTPC in utilities.
Other targets
Meanwhile, Brokerage house Axis Securities has given a year-end (Dec 2022) target of 20,200 for Nifty50.
As per the brokerage, earnings momentum would be the critical factor for the market performance moving forward. While it has been strong in the past few quarters and largely in line with expectations for the current quarter, the future outlook of the earnings trajectory remains more critical at this juncture, it added.
