BofA Securities Pegs Nifty Target At 19,500 For 2023

BofA Securities has set 19,500 as the Nifty target for 2023.

"The Nifty would fluctuate 10% up and down at max from current levels in 2023—somewhere between 17,000 to 20,000 levels—to settle at 19,500 towards the end of the year," Amish Shah, head of India research and managing director at BofA Securities, told BQ Prime.

While persistent volatility is expected, the target implies that India could underperform emerging markets but outperform developed markets.

"Buying the dips and being tactical on swing sectors—mostly global revival plays like metals as also defensives with some triggers, such as staples and power utilities—could help generate better returns."

According to BofA Securities, the current NSE Nifty 50 valuations are a concern.

At the end of November 2022, the MSCI (Morgan Stanley Capital International) India valuation premium to emerging markets remained elevated at 98% versus the long-term average of 45%.

Sticky India inflation, global growth and U.S. Fed pivot are also a drag on the market inflation, it said.

BofA Securities expects sharp cuts to Nifty FY24 and FY25 earnings growth at 7% and 9% versus street estimates of 19% and 13%, respectively.

While the 'markets are expensive' argument holds true, BofA Securities does not expect valuations to contract below long-term average.

Domestic flows could provide downside support, it said.

A passive money inflow of $20 billion in 2023 is estimated from domestic institutional investors in the form of provident funds, pension, insurance funds and SIPs.

This is supported by data, which suggests that the equity allocation limit by employee provident funds has gone up from 5% in FY16 to 15% in FY22, and is further expected to go up to 20% in FY23 and FY24.

Investments in SIPs have also risen 10 times from FY16 numbers, indicating a shift in allocation of household financial assets. There is a higher proportion of savings being allocated in favour of equities and small savings, a move away from deposits as indicated by FY22 data, it said.

Even as interest rates and term deposit rates of banks are expected to go up in the coming year, BofA Securities said that while the active funds (SIPs) behaviour may be uncertain, the heavy passive money flows will continue to support the downside.

BofA Securities said it is not concerned about foreign institutional investors re-allocating funds to other emerging markets like China, which are opening up and trading at cheap valuations.

Since the October 2021 peak, BofA Global Research said that FII’s have largely been net sellers withdrawing $28 billion since. FII ownership of Indian equities has been at multi-year lows of 18%—as of September 2022, based on a bottom-up analysis—versus 23% in September 2019.

Almost 90% of foreign funds allocating to emerging markets are unilateral and directionally linked, it said. This means that FPI flows into the EM basket would imply inflows to India, and that India and China do not compete for EM allocation.

"While the amounts allocated to India could be disproportionate as compared to China, we expect an inflow not an outflow," Shah said.

BofA's analysis of three U.S. recessionary cycles over the past three decades suggests:

• India’s GDP growth contracts lesser at -190 basis points on an average versus -280 basis points for the U.S.

• India’s export growth contracts sharply from double-digit to low single-digit/declines; IT sector underperforms broader markets.

• Economic growth contraction is less protracted for India; one to three quarters versus two to seven quarters for the U.S. Also, India recovers faster at two to three quarters versus three to eight quarters for the U.S.

• Indian markets deliver much higher returns versus the U.S., 12 months post the recession.

BofA Securities has suggested two strategies for investing in the coming year—buying the dips and rotating within sectors.

It is overweight on domestic cyclicals like financials, industrials, cement; global revival play like metals; and defensives like staples and power utilities.

It is underweight on IT, consumer discretionary, autos, telecom, pharma and energy.

Overall, Shah expects large caps to outperform as compared to mid and small caps in 2023.

"Looking beyond CY23, long term, we believe India could benefit from a confluence of six structural themes—rapid infrastructure ramp up, de-carbonisation, curtailing imports, opening government monopolies, improving tax compliance and improving digitisation and financial inclusion—and ongoing reforms," said BofA Securities.