BofA cuts Nifty year-end target to 14,500

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BofA Securities revised its year-end Nifty target to 14,500 (from 16,000) with a target multiple of 17x (near the 10-year average) from 18.4x, taking into account the negative event horizon short term. The target implies a potential downside of 7% from current levels, according to a report. For sensitivity, Nifty’s earnings growth moderation to 15% in FY23/24E could further lower the target to 13,500, implying potential returns of (-)14%, a he added.

“Clever valuation, although corrected, still looks vulnerable near its 10-year average. We maintain a cautious stance with a defensive sector bias and a revised year-end Nifty target of 14,500,” BofA Securities wrote in a note. With the Nifty now trading at 17x consensus one-year forward EPS (21x as of January 1, 2022), BofA believes it could experience further contraction, driven by profit cuts and slowing global growth. The possibility of the United States slipping into a recession is a major downside risk that could act as a negative trigger, according to the report.

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BofA remained cautious on Indian markets and cited five reasons for its stance. These are: the rapid tightening of monetary conditions, slowing growth/recession fears in the US, earnings cuts, crude oil prices and valuations. According to the brokerage, most of the above negative events are likely to occur over the next two to three months or more clarity will emerge on these fronts. Pricing these negatives could drive markets to August-September lows, according to the report.

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Helped by strong inflows from domestic institutional investors (~$24.3bn year-to-date, versus $26bn outflows from FII), Indian equities have outperformed their global peers. The Nifty is down 11% against a 23% drop in the S&P 500.
According to the BofA report, Indian markets could see a sharp correction if domestic equity inflows reverse, driven by higher yields (debt/bonds could be an alternative investment option) or a buyback caused by the market correction. “However, our analysis since 2000 suggests: (1) only a small negative correlation (-11%) between domestic equity outflows and debt inflows; (2) the overlap of equity outflows and debt inflows is only seen for 23%-29% of monthly cases, even when 10-year GSec yields were above 8-9%…” says The report.

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