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Cautious on near-term markets: Amish Shah of BofA Securities

Cautious on near-term markets: Amish Shah of BofA Securities

In June, Bank of America Securities lowered its end-2022 Nifty target to 14,500 from the earlier 16,000; target at the start of 2022 was 19,100.

"We recently (June 22nd) cut our 2022’end Nifty target to 14.5k from 16k. Our target at the start of 2022 was 19.1k," said Amish Shah. "We recently (June 22nd) cut our 2022’end Nifty target to 14.5k from 16k. Our target at the start of 2022 was 19.1k," said Amish Shah.

The benchmark Nifty will be around 14,500 around end-2022, says Amish Shah, Head, India Research, Bank of America (BofA) Securities. Since the start of this year, he has cut the Nifty target twice - once from 19,100 to 16,000 and then to the current 14,500. Pricing in the negatives, he believes that markets could bottom by August/September 2022. 

Excerpts: 

What is your Sensex of Nifty target for end-2022? 

14,500 

Was there any downward or upward revision in the Sensex/Nifty target since January this year?  

We recently (June 22nd) cut our 2022’end Nifty target to 14.5k from 16k. Our target at the start of 2022 was 19.1k 

The Indian benchmarks are down around 10% from their highs touched in October last year (they were down 18% till recently). Do you think Indian indices can enter a bear market with a fall of 20% or more?  

Our target of 14.5k implies around 11% downside to Nifty from current levels. From the highs of nearly 18.5k in Oct’2021, our target would imply around 22% downside. Technically, this indicates a bear market scenario. We do continue to remain cautious on markets near term given most risks are skewed to the downside: global macro concerns including rising risks of recession in the US, potential for crude to sustain at higher levels, with risks of spike to 150 US$/bbl if European sanctions severely hit Russian production (to levels 20% earnings growth in FY23, amongst other factors. 

Has the Indian stock market bottomed out? If not, then if you have to put a number or a range for Sensex/Nifty bottom, then what that would be?  

We haven’t put any explicit number for a bottom. But we do note that most of the above negative events are either likely to play out in the next 1-2 months or could see more clarity. Pricing in of these negatives, we believe, could lead markets to bottom by Aug/Sept 2022. 

Are we still in a long-term bull market with the ongoing downswings only technical corrections?  

We don’t think the ongoing muted market performance is merely a technical correction. Tightening global liquidity (key driver of the bull market previously), spiking inflation and consequent strong rates response by key global central banks and now forecasts of global growth slowdown, including fears of US recession are all fundamental factors driving weakness in most global equity markets. 

FPIs have sold nearly $34 billion in nine months. Would the FPI selling continue at the same pace or you expect some sort of reversal or reduced pace of selling? 

While the sharp sell-off has driven FPI ownership of Indian equities to record lows of nearly 19%, it still remains difficult to predict when these outflows stop/ reverse. We think global macro concerns abating or at least more clarity emerging on this front, especially on the probability of US recession, remains the single most important factor in driving such reversal of FPI flows. 

Domestic institutional investors and retail investors have been providing much support to the markets at a time when FPIs have been selling significantly. You expect that trend to continue or does the ongoing downswing has the potential to affect such inflows as well? 

There are some concerns that rising yields could make debt/bonds an attractive alternative investment option for domestic investors. But we do expect strong DII inflows to continue based on our analysis since 2000 which suggests: (1) only a small negative correlation (-11%) between domestic equity outflows & debt inflows; (2) overlap of equity outflows & debt inflows is seen for only 23%/ 29% of monthly instances, even when 10yr gsec yields were as high as >8%/>9%. 

If you had to pick 3-4 sectors with a medium-term investment horizon, which would those be? Also, sectors to stay away from.  

Given our cautious stance currently, we prefer a defensive strategy skew and are overweight on sectors like Staples, Healthcare & Utilities. We are also overweight Energy sector on high energy prices and select domestic cyclicals (Financials, Industrials, Autos). We are underweight on Communication Services (5G auction overhang), high beta discretionary (growth slowdown/ valuation concerns) & materials (de-rating on pricing pullbacks). 

Is this a good time to look for potential multi-baggers in small-caps, or is it better to stay safe and go for blue chips?  

We prefer large caps over small and midcaps, given our bearish overall view on the markets.