The 2024 financial year will be a year of consolidation where the Nifty is estimated to move in the range of 16,000 to 18,000 and a certain degree of underperformance may be seen in emerging and fixed income markets, according to Amish Shah of BofA Securities India Ltd.
"If you are an incremental investor, you are better off with bonds than equities to procure compelling returns," the head of India equity strategy at BoFA told BQ Prime's Niraj Shah in an interview.
Shah cited the "worsening" macro conditions and "lofty" earnings expectations as the reasons for a substantial downside.
The current consensus points to a 18% earnings growth for the 2023 fiscal and 14% for the current fiscal, making it a cumulative growth expectation of 33% in two years.
But Shah only projects a cumulative growth of 17% in two years, which is almost half of the projected number. "Earnings growth will get halved or reduced significantly, which means valuations that seem to be reasonable at present will start to look rich later."
Pockets Of Acute Disappointment
Information technology, consumption and telecommunications will see outsized earnings cuts, Shah said, as he explained his stance on these three pockets by highlighting some global factors.
He projects that the U.S. would undergo recession by the second half of this year and global macro conditions would deteriorate as compared to the situation at present. Forward markets in the U.S. suggest a rate cut in June, but the rates will probably pause and only be cut by March 2024, according to Shah.
This disconnect in terms of credit conditions and growth in the West, coupled with urban growth levelling off in India with ambiguous rural revival, only points at a much lower earnings growth as compared to consensus.
Therefore, the growth being projected in some rural focused sectors and urban consumption is very "less" likely to materialise anytime soon, Shah said.
He said "credit tightening and easy liquidity is unfortunately the worst scenario for equities and this is the kind of period we are getting into".
Market bottoms during a recession, not before a recession.Amish Shah
What could help arrest these downsides? He pointed out:
Ownership by foreign institutional investors is at a multiyear low as it used to own 23% of Indian equities in 2019 and currently dropped to 18.5%.
Most FIIs can't take India to underweight, but only neutral weight primarily because India's macro is positioned relatively stronger than its global peers.
But a projected neutral weight of 24 basis points doesn't provide much room for incremental selling. This means, the pace of FII outflows will definitely slow down.
Passive flows into India from the systematic investment plans, pension funds, provident funds and others could be nearly worth $20 billion, of which 75% will end up into Sensex and NSE Nifty 50 exchange-traded funds. This will provide strong support to the indices at lower levels or long-term averages.
Nifty outperforms the S&P BSE Sensex because the economy rebounds faster in India, which means once recession concludes in the US, India will be placed to give better returns.
Themes That May Perform Well
Choose large caps over mid caps because of better quality and for the fact that 75% of the passive Indian flows will end up in large caps, Shah said.
He prefers financials over IT, investments on capex-related themes over consumption, power utility over telecom, steel and cement over energy. Shah sees large metal demand from infra capex.
Over a five-year period, India has the potential of curtailing its current account deficit by 75%, which will give a lot more macro stability, according to Shah.
From a five-year perspective, he estimates that India may experience a confluence of credit growth cycle, capex and real-estate upcycles and a startup subcycle.
He views Indian markets as stronger than the U.S. from a five-year perspective despite having cautious views on India's growth in the next two years, especially given his firm estimate of a recession starting post July.
Watch the full interview here:
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