If US avoids recession, how far can Nifty go? BofA analysts predict

After the US Federal Reserve and other top economists from Bank of America (BofA) and JPMorgan dropped their 2023 recession forecasts, Dalal Street bulls are gaining mojo on hopes of continuing inflows of foreign funds.

Global brokerage firm BofA said it sees Nifty inching ending December 2023 at 20,500 as returns have mostly been positive at least three months prior to the end of the US recession as well as during the phase of Fed's penultimate rate hike to six months after the start of rate cuts (current phase).

"Domestic inflows could continue to be robust and a third of Nifty market cap is still below long-term average valuations; few of which offer buying opportunity," BofA's Amish Shah said while building a case for buying largecaps as the valuations of small and midcaps are rich and earnings growth estimates seem stretched.

He also sees the possibility of a re-rating for Nifty, which is currently trading at 19X 1-year forward PE (weighted average of current constitutes).

"The Street perceives Nifty's long-term average to be 16x or weighted average of "historical constituents". Considering Nifty's constituents over time have changed to include more growth-oriented companies, we believe the right way to look at valuations is to be more forward-looking and extrapolate a long-term average, basis current constituents, which comes to 19x (Nifty's current levels)," Shah said, adding that a no recession scenario in the US could imply higher FPI inflows to EMs, especially India (on a strong macro footing).

This could lead to expansion in Nifty valuations towards +1SD levels, the brokerage firm said.

When it comes to earnings growth, BofA sees a risk of earnings cut.

"We advise avoiding sectors 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 vs earnings. We are cautious on IT, select autos & discretionary, metals, cement, telecom, utilities & materials on the back of this," it said.

BofA is overweight on financials (cheap valuations, low risk of large earnings cuts), industrials (strong capex/real estate upcycle), select autos (passenger & commercial vehicles on volume growth as well as margin expansion) and healthcare (better pricing in the US, strong India/Specialty business).

"While our US economists believe the US will no longer face recession, any negative surprises in the US (economy, fiscal &/or monetary tightening) could weigh down on markets. Busy upcoming election calendar in India is also a risk factor to watch," it said.

Top picks
Top stock picks of BofA include HDFC Bank, ICICI Bank, Paytm, L&T, HUL, ITC, Britannia, Sun Pharma, Dr Reddy's, Maruti Suzuki, Tata Motors, Zomato and Reliance Industries.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)