BofA Securities ups Nifty target to 20,500; sees markets get rerated

The foreign brokerage firm prefers large-caps over their mid-and small-cap peers as the valuations in case of the latter are rich and earnings growth estimates seem stretched.

BofA Securities has upped its December 2023 Nifty target to 20,500, up nearly 4.5 per cent from the current levels, and a jump of around 14 per cent from its earlier December 2023 target of 18,000 forecasted in May 2023.

The research and broking house now believes that the US economy may not undergo a recession, which in turn will see bulls take a firmer grip on the markets as their key concern (recession) will be addressed and will support a continued valuation expansion.

“By December 2023, we expect Nifty to gain further to 20,500, as: a) historically, Nifty’s returns have mostly been positive at least three months prior to the end of US recession as well as during the phase of US Fed’s penultimate rate hike to six months after the start of rate cuts (current phase); b) domestic inflows could continue to be robust; and c) a third of Nifty market cap still below long-term average valuations, a few of which offers buying opportunity,” wrote analysts, led by head of India research Amish Shah, at BofA Securities.

As a strategy, BofA Securities prefers large-caps over their mid-and small-cap peers (SMID) as the valuations in case of the latter (SMIC) are rich and earnings growth estimates seem stretched.

Back in May 2023, BofA Securities had suggested investors exit the markets and buy at lower levels. They had expected the Nifty50 to drop to 16,000 levels in the months ahead amid possibility of a cut in corporate earnings growth, high market valuation then (one-year forward P/E of 19.5x), expectation of interest rates staying elevated for longer-than-expected and credit tightening.

“We see no upside to our Nifty year-end target of 18,000; would look to book profits. That said, we would advise buying potential market dips (Nifty at 16,000) on strong domestic flows, weak FII positioning (FII ownership of NSE500 Index down to 19.2 per cent in March 2023 23 versus 23 per cent in December 2019) and resilient India macro,” Shah wrote in a May 2023 note.

Near-term risks

That said, BofA Securities still believes that the markets could drag in the near-term given the recent spike in crude, inflation spike led by erratic rains, and commodities rally on potential China stimulus. That apart, the busy election calendar over the next few months that ends with the general elections in 2024 is another risk factor to watch.

"The impact of these factors maybe transient/not significant. We, hence, advise buying any potential dips. Even if China stimulus does lead to FII outflows for India in the near-term, this trend reverses on a yearly basis. Besides, our analysis suggests contraction in Nifty’s valuations could see significant active inflows for domestic institutional investors (DIIs), limiting the downside," Shah wrote in the August 08 note.

Meanwhile, BofA continues to see risks to Nifty’s earnings growth (BofAe FY24/25: 13/11 per cent versus street estimates at 17 per cent). Among sectors, it is avoiding those with high risk of earnings downgrades, growth mainly driven by margin expansion (risk from commodities’ spike), or the ones that saw recent rally mostly led by valuations expansion versus earnings. As a result, they remain cautious on information technology (IT), select autos & discretionary, metals, cement, telecom, utilities and materials sectors.