BofA Sets Nifty Target Of 20,500 By December As U.S. Recession Fears Ebb

BofA Securities has projected the Nifty at 20,500 points by December this year in the event the U.S. skirts a recession, increasing foreign inflows into India.

The financial services firm said it values Nifty at 20.5 times one-year forward earnings ratio based on their analysts' bottom-up price objectives. Nifty's constituents over time have changed to include more growth-oriented companies, it said.

A 'no-recession' scenario in the U.S. takes away the market's key concern and supports a continued valuation expansion, according to BofA Securities.

It lists three reasons:

• Historically, Nifty's returns have mostly been positive at least three months prior to the end of a U.S. recession as well as during the phase of U.S. Fed's penultimate rate hike to six months after the start of rate cuts.

• Domestic inflows could continue to be robust.

• A third of Nifty market cap is still below long-term average valuations and a few sectors offer buying opportunity.

The Nifty's 15% rally since March has largely been liquidity-driven by valuations expansion (11%) rather than earnings growth (4%), BofA Securities said.

The firm attributed this to an inflow of close to $24 billion over the past four months in Indian equities from foreign and domestic institutional investors.

Within emerging markets, lagging economic revival and weaker growth outlook in China led to higher FPI flows for India, which saw $18 billion pour in since March this year as compared with a flight of $16 billion from China in CY22.

This led to the Nifty's outperformance by 15% as compared with Hang Seng's 2% decline since the end of March last year.

BofA Securities sees good buying opportunities across financials, healthcare and energy as the Nifty currently trades at average valuations.

It prefers large caps as small and mid caps' valuations "are rich and earnings growth estimates seem stretched".

• Financials: Remains overweight on sustained credit growth and earnings visibility.

• Healthcare: Improved competition leading to better pricing trends and drug shortage in the U.S. augur well for the sector. Steady launches and specialty ramp-up in select stocks sustain earnings growth momentum.

• Industrials: Sustained momentum in government capex with private capex accelerations spell healthy order momentum.

• Auto: Remains 'overweight' on select passenger and commercial vehicles on the back of steady domestic demand and the upcoming festive season.

• Staples: Healthy volume growth, rural recovery and sustained food and beverage sector momentum has turned it 'overweight'.

The firm remains cautious on sectors like information technology, select autos and discretionary, metals, cement, telecom and utilities and materials.

On the risk side, BofA Securities said any negative surprises in the U.S. economy or its fiscal or monetary tightening could weigh on markets. Additionally, upcoming state and parliamentary elections in India are also counted as a risk factor.

In the near term, the recent spike in crude prices, higher inflation led by erratic rains and commodities rally on potential China stimulus may cause a drag, it said.

However, BofA Securities said the impact of these factors may be transient and advised buying on any potential dips.

According to its analysis, contraction in Nifty's valuations could see significant active inflows for DIIs, limiting the downside.