Muted returns ahead for Nifty in 2023? BofA Securities sets index target at 19,500 level

BofA Securities has set Nifty 2023 target at 19,500 level, implying muted but positive returns. The foreign brokerage expects the 50-pack index to broadly stay in a range of 17,000-20,000 levels during the year, led by debate on two scenarios of a protracted global revival or a soft landing. India could underperform emerging markets but may outperform developed markets, it said.

Buying the dips and being tactical on swing sectors could help generate better returns, the foreign brokerage said.

BofA Securities talked about two scenarios playing out in 2023. The first scenario would have sticky inflation and global growth drags. In this scenario, BofA expects sharp cuts to Nifty FY24/25 earnings growth at 7 per cent/9 per cent.

It argued that valuations are unlikely to contract below long term average, as DIIs could see $20 billion inflows from provident funds, pension funds, insurance funds and SIPs alone.

“External facing IT/materials/energy/select autos (21 per cent of Nifty's sales) & consumer discretionary with rich valuations could lead this fall; while domestic cyclicals & defensives could outperform. Overall, Nifty could trade at 17,000 level. We advise buying these dips as our analysis suggests Indian economic growth/markets falls lesser & recovers faster during global recessions," it said.

BofA's second scenario talked about soft landing. In such a case, Nifty could trade at 20,000, it said despite cut to Nifty FY24/25 earnings growth to 8 per cent/12 per cent. This scenario sees FIIs' India positioning at a multi-year low.  In scenario 2, BofA sees IT, materials and cyclicals rallying and defensives underperforming.

Post market volatility, once macro debate settles, BofA expects Nifty to end 2023 at 19,500, implying muted but positive returns.

"We assume bearish/Scenario 1 earnings given BofA global views suggest very likely recession in US, Euro & UK, risks skewed towards a more prolonged rate expansion, additional Fed tightening, a later but deeper recession & persistent inflation, $100 a barrel crude average and spike to $110 in H2. Our portfolio skew balances volatility with overweight on domestic cyclicals financials, industrials, cement, global revival play metals and defensives staples/utilities. We are underweight on IT, consumer discretionary, autos, telecom, pharma & NW energy," it said.

Looking beyond CY23, BofA Securities believes India could benefit from a confluence of six structural themes and ongoing reforms.

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