Large Caps Offer Opportunities, Small Caps Are Overstretched, Says BofA Securities' Amish Shah

The economic outlook in India is currently robust accompanied by strong corporate earnings as compared with the rest of the world, according to BofA Securities.

The markets division of Bank of America Corp. has a positive perspective on these developments and is largely not bearish regarding the market.

BofA Securities maintains that a U.S. recession is not imminent and this viewpoint has led them to adopt a constructive stance on market levels, Amish Shah, head of India research at BofA Securities, told BQ Prime's Niraj Shah.

"The view is that the economic outlook in the U.S. is going to be much better," Shah said. "There is going to be no recession and that takes away a concern that we had for Indian markets."

BofA Securities expects that such a scenario will provide the necessary support for the ongoing expansion of valuations. BofA projects that the NSE Nifty 50 can see further gains and potentially reach the 20,500 level by December.

Shah said that earnings of Nifty companies within the consensus would likely face further cuts.

"We are primarily more concerned about those sectors and stocks where (a) large part of earnings growth is only driven by margin expansion," he said.

It's probable for the headline indices to provide favourable returns, while the essence of successful investing lies in stock-picking, according to him.

Small-cap stocks appeared to be significantly overstretched and within the mid-cap category, the situation appears to be a mix of opportunities and challenges, he said. In the realm of large-cap stocks, there are distinct pockets of opportunities that stand out, Shah said.

In terms of potential opportunities, sectors with reasonable valuations, such as financials, healthcare and energy are good bets, he said.

BofA Securities is overweight on financials due to attractive valuations and minimal risk of significant earnings reductions, real estate which is benefiting from a robust upcycle, select automobiles driven by volume growth and margin expansion, and healthcare buoyed by improved pricing in the U.S. market, it said in a note on Aug. 8.