Nifty May Rise 10% By December; Banks, IT And Telecom Among Sectors Preferred: BNP Paribas

Benchmark index NSE Nifty 50 may scale a 10% climb by the end of 2025, amid global headwinds and cloud over domestic growth, BNP Paribas said in its yearly outlook released on Wednesday.

"Our end-2025 Nifty 50 target of 25,500 implies 10% upside potential from current levels," the brokerage said.

The 2025 outlook is marked by "cloudy skies" as India's gross domestic product growth has slowed, food inflation remains high, and commodity prices have started moving up, BNP Paribas said.

"With elevated US bond yields, we believe the appetite for buying expensive emerging market equities should remain low unless there are signs of a strong recovery in growth," it added.

In the interim period, strong domestic inflows continue to support the Indian equity market and "we do not see any major risk to this," BNP Paribas said.

The steady domestic flows have mitigated the impact of outflow of foreign portfolio investments to some extent. "Continued strong domestic flows will remain key for the markets, especially mid- and small-cap stocks, which have continued to become more expensive relative to the markets," it added.

Despite the inflow from domestic institutional investors being strong, the continued exit of FPIs "remains a concern for the market". Besides FII selling, promoter selling through initial public offerings and offers for sale has added to the supply in the market, it added.

The slowdown in corporate earnings also spells concern. "In the last six months, we have seen broad-based earnings estimate cuts. Initial trends for the December 2024 quarter, as highlighted in business updates by the companies, do not seem very encouraging," BNP Paribas said.

"Overall, we see low likelihood of valuation multiples rerating in 2025 and expect market returns to track or slightly lag earnings growth," it added.

Among the domestic-economy driven sectors, BNP Paribas prefers banks, consumer discretionary, industrials, passenger vehicles, as well as hospitals and diagnostics.

Among the sectors not preferred by it are consumer staples, microfinance, consumer durables, and two-wheelers.

"We like banks due to their attractive valuations, reasonably strong earnings growth outlook and our expectation of no major credit-spikes. We expect public capital expenditure to shift from transportation infrastructure spending to a more balanced approach, focusing on energy infrastructure, including power generation, transmission and distribution," it stated.

In the durables sector, BNP Paribas prefers the fast moving electrical goods segment, instead of cables and wires and white goods segments "on attractive valuations". In automobile, it prefers passenger vehicles instead of two-wheelers due to "better volume growth outlook".

Hospitals and diagnostics are on the list of preferred sectors due to "robust earnings growth outlook", it said, while adding that a strong growth in the US could benefit the information technology sector more than pharmaceuticals.

US President Donald Trump, who has threatened blanket tariffs on all imports, "will implement most, if not all, campaign promises on foreign, economic and trade policies", according to BNP Paribas' economists.

Their base case scenarios assumes that tariffs on China and the rest of the world will increase, rather than merely being used as a negotiating tool.

"The overall combination of the proposed policy measures is likely to boost prices and dampen economic growth in the US as well as lead to a tighter policy from the US Federal Reserve than would otherwise be the case," the brokerage added.

A tighter monetary policy in the US will be negative for the Indian rupee, as seen in the last quarter of 2024. In a higher tariff scenario, countries which are more dependent on external trade would be impacted more, it said.

"In this context, India, with its more inward-looking economy, is relatively well placed," BNP Paribas noted.