Earnings To Stall? Zero Growth Risk Looms If Iran War Continues, Says BofA

With global markets reeling from the ongoing conflict in the Middle East, India is no exception. In fact, the worst is yet to come for the Indian economy, with BofA now sounding an alarm and warning that rising stagflation fears and the widening conflict could lead to a zero percent earnings growth, in the worst-case scenario. 

In a sobering India Strategy report, BofA has cautioned that if the ongoing Iran War continues, it could trigger a sharp slowdown in both demand and investments. The brokerage firm has drawn a worst-case projection, in which Indian GDP growth could crater towards 3%, whereas Nifty earnings growth could drop to 0% by FY27.

The zero percent growth outlook takes into account the potential margin compression and weak volumes, which could be a reality if the Middle East conflict persists.

Even in a base-case scenario, the outlook remains grim. BofA has slashed its FY27 Nifty earnings growth forecast to 8.5%, which is significantly below the current market consensus. 

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While BofA believes valuations are now indeed reasonable enough to offer some near-term upside, it adds that the market has not yet reached a true value zone and is likely to underperform other emerging markets.

Much of the risk revolves around the mounting stagnation, which has prompted a tactical retreat from sectors most sensitive to interest rates. The brokerage has, therefore, downgraded private banks, NBFCs, real estate and passenger vehicles to 'underweight'. They are also staying cautious on mass consumption categories like staples and retailers, as well as capex-heavy sectors such as steel, cement and railways.

Instead of these sectors, BofA is now doubling down on the energy security plays, including regulated power utilities, gensets and cables, as well as upstream energy producers like ONGC, which remains a top pick.

On the other hand, oil marketing companies such as HPCL and BPCL have been downgraded to underperform due to mounting losses on account of volatile crude prices. 

For those looking for growth, BofA suggests a narrow focus on well-off consumption plays such as jewellery and travel, in addition to defence stocks. The firm believes these are the only reliable hedges against a stalling economy.

ALSO READ: 'Open The F***** Strait': Trump Vows To Obliterate Iran's Power Plants, Bridges On Tuesday If Hormuz Stays Closed

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