BofA Securities India expects Nifty to correct to 15,000 in near term, after a strong rally in the last one-and-half years.
“Our analysis of past market rallies suggests the current rally (+118 per cent over 73 weeks) could have limited further runway. We see risk of estimate cuts and with valuations at a peak, we expect markets to correct 9 per cent near term with our Nifty target at 15K,” said Amish Shah, Research Analyst, BofA Securites India, in a release.
“Taper talks in the US, potentially higher US bond yields and USD, consensus EPS cuts, recent muted IPO gains negatively impacting retail investor sentiment could act as negative triggers,” he added.
BofA Securities remains overweight Industrials on expectation of multi-year capex upcycle and financials on likely peaking credit costs and a pick-up in credit growth. “Given that the rally in metals is likely near an end and Fed tapering could put pressure on commodities, we cut Materials to underweight from overweight earlier. With cautious a view on markets, we raise skew towards defensives in ataples (from neutral), utilities and IT (overweight earlier) and maintain underweight on discretionary,” the report further said..
Risk of US tapering rising
Following the July FOMC minutes released this week, BofA Securities global analysts now see risk of the Fed tapering beginning November 2021 vs a prior expectation of Jan 2022.
“The Street has continued to increase earnings estimates (Nifty FY22 EPS up 2 per cent since Mar 2021 and up 7 per cent YTD) despite emerging risks: we particularly expect estimate reductions within the materials (falling commodity prices) and consumer discretionary (weak demand, inability to pass on cost pressures) sectors. Valuations for Nifty is expensive at 19x 2-yr fwd EPS or 8 per cent premium to +2SD levels. Emerging risks and likely estimate cuts could lead to a correction,” the report added.
Muted IPO to temper Retail participation
Increased retail participation (64 per cent of daily volumes since Mar 2020/post Covid vs 45 per cent prior) has been one of the key contributors to the rally. However, muted gains within IPO listings recently poses a risk to levered retail positions.
“We screen for stocks with increased retail shareholdings during the course of the current rally, despite having weak fundamentals: negative FCF yields, high leverage, poor RoEs,” it said.
Prefer large caps
Nifty’s valuation premium vs mid caps & small caps has narrowed to just 9 per cent (LTA) and 3 per cent (vs 29 per cent LTA), respectively, given sharp outperformance of mid & small caps.
“We expect this trend to reverse and with a cautious market view, prefer large caps near term. Also, any scale down of retail positions could put pressure on mid/small caps. Further, we prefer stocks where the Street has high confidence in EPS est. (low EPS dispersion).”