Foreign brokerages trim Nifty December 2022 target amid headwinds

Our 10 mean reversion scenarios put the Nifty50 December 2022 target at an average of 17,500, said Jefferies

Multiple headwinds in the form of Russia – Ukraine crisis that has seen crude oil prices jump to an eight- year high of $97 a barrel, prospects of faster-than-expected hike in rates by the global central banks, especially the US Federal Reserve (US Fed) and its impact on bond yields, impending state elections in India and the fears of a rise in inflation as oil prices surge has seen foreign brokerages recalibrate their return expectation from the markets in 2022.

WATCH VIDEO: Equity investors should pare return expectations, says R Venkataraman, chairman, IIFL Securities

In their latest note, those at Jefferies have cut their December 2022 target for the Nifty50 to 17,500 – around 3.5 per cent higher from the current levels. Though the selling by the foreign institutional investors (FIIs) since October 2021 has been absorbed by domestic institutions and cushioned the market impact, the upcoming initial public offer of Life Insurance Corporation (LIC) can disrupt this balance, they cautioned.

"Unwinding of the global liquidity calls for mean reversion on valuations. Our 10 mean reversion scenarios put the Nifty50 December 2022 target at an average of 17,500 with the range being 16,500-18,500. Key near-term risks include LIC IPO amidst continued foreign selling, a perception that the RBI might be behind the curve amidst the twin deficit concerns. In our model portfolio, we replace Ambuja Cement with Hindalco," wrote Mahesh Nandurkar, managing director at Jefferies in a co-authored note with Abhinav Sinha.

The ample global liquidity scenario, Jefferies cautioned is already under threat as high inflation is prompting policy reversals. The US Fed will end its quantitative easing (QE) in March and Jefferies believes that 7 rate hikes of 25bps are likely in 2022, followed by 4 in 2023. Record inflation in the Eurozone has also raised a question mark on the need for QE by the European Central Bank (ECB).

Back home, India is seeing the prospect of a 'twin' deficit - fiscal and current account - simultaneously over the next 12 months. The import surge is quite broad based (non-oil, non-gold rising at 20 per cent two-year CAGR now) and recovering local demand, along with high commodity / oil prices, could keep the current account under pressure, Jefferies said. All this has seen FPIs sell equities worth $20 billion since April 2021 in the secondary market.

In the last five months (since October 2021), the Nifty50 index has lost over 2 per cent with the biggest cuts (4 per cent to 14 per cent) seen in realty, fast moving consumer goods (FMCG), pharma and oil & gas indices on the NSE during this period, data show.

WATCH VIDEO: How will the Russia-Ukraine crisis, US Fed affect rupee?

Higher inflation back home in the backdrop of a spurt in crude oil prices and the rate hike cycle by the US Fed also saw analysts at BofA Securities recently cut their December-2022 Nifty target to 17,000 from 19,100 earlier. However, they do suggest that there have been instances of Indian markets delivering positive returns during rate hikes by the RBI or the Fed, driven by earnings growth, even as valuations contracted.

"Our US economists now expect a fast Fed hiking cycle, with a 175/100 bps hike in the calendar year 2022 / 2023. Fed/RBI hiking cycles since 1994, suggests market valuations could contract. That said, past cycles also suggest market downsides are blunted if supported by robust earnings growth. India is well-placed and is supported by 'growth-focused' fiscal/monetary policies," wrote Amish Shah, head of India Research at BofA Securities in a recent note.