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BofA Securities has revised its Nifty target for December 2022 to 17,000 from 19,100 to price in the risks on account of rising interest rates and bond yields. The brokerage said it now expects a fast Fed hiking cycle.
“Our US economists are now expecting seven rate hikes in CY22, starting March 2022, and a further four hikes in CY23, of 25bps each. Also, there are concerns around a potential 50bps hike in March, 100bps by July and inter-meeting hikes, amongst others. Within India, we expect RBI to hike by 100bps by March 2023,’ a note by BofA said.
The note further said that the market valuation shrinks if it is above long-term averages before the start of the hike cycle.
“Given current market valuations, we think valuation contraction is likely,’ the note said.
However, the note added that there has been instances of Indian markets delivering positive returns during rate hikes by RBI or Federal Reserve driven by earnings growth, even as valuations contracted.
“We believe India’s corporate earnings could structurally outpace nominal GDP growth led by the start of multi-year Capex/credit growth/start-up cycles and ‘growth-focused’ fiscal and monetary policies,” the note said.
The note added that India’s calendar year (CY) 2022 earnings are likely the best amongst emerging markets.
“A strong outlook is reflected in our macro analysts maintaining their views of 8.2 per cent real GDP growth in FY23,” the note said.
The note said political stability is a crucial risk. and the market’s breadth is likely to narrow, and volatility could rise.
“We upgrade select defensive sectors having valuation comfort, like Staples & Healthcare. We maintain overweight skew in favour of domestic and Capex focused cyclical, industrials and financials. Contrary to perception, past cycles suggest limited risk to capex cycle from rising rates.”
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