Zero Nifty return in next 12 months! What Emkay says on extended bear market, stocks

Emkay Global said it has cut Nifty target to 22,000 from 24,000, following the surprise election verdict where the Prime Minister Narendra Modi-led BJP failed to secure a majority of its own. The brokerage expects nil returns in he next 12 months, even as it ruled out any extended bear market. Emkay Global said the economic direction is unlikely to change for the next 2-3 years, though some structural reform is now on the back-burner. 

"This may result in some earnings downgrades in the near-to-mid-term. However, companies will ride out this short cycle given their strong balance sheets and cash flows. The major impact would be a derating, in our view," it said.

Emkay sees the government-formation process to be completed over the next 2-3 days, helmed by Narendra Modi as PM. 

"The accommodation of key allies would be close tracked – the number of ministers inducted as well as the ministries they are given. The identities of senior ministers (Finance, Home, Defense, and External Affairs) would be another key monitorable. The NDA may publish a broad policy document once the cabinet is sworn in which would give us some perspective of the new government's policy imperatives. We would then move on to the Union Budget, expected in early Jul-2024," it said.

Emkay Global has shifted its near-term preference to the large- and top-end of the midcap range from small and midcap space. This is because it prefers stocks with strong earnings visibility, reasonable valuations, and low risk. From a 2-3 year perspective, it retained its preference for SMIDs, as it thinks the current cycle will continue to be investment over consumption and manufacturing over services.

In its model portfolio, Emkay's sectoral preferences has changed. Industrials are underweight now due to rich valuations and weak sentiment. It downgraded real estate as well. 

"We upgrade FMCG, IT, and Healthcare to OW, largely on defensive positioning. FMCG is showing signs of a demand pickup and IT valuations give us some comfort. If the new government reacts to the election results with a demand stimulus, it would be an additional positive but not our base case," it said. 

Besides, the brokerage has retained its overweight on durables, with a greater focus on OEMs over ancillaries. Its contrarian underweight on financials continues. It said is exiting all PSUs and companies with weak earnings structures. 

Zomato, Delhivery (valuations, weak earnings structure), Ambuja Cements (high valuations), ITC (budget risks),  Motherson Sumi Wiring, and ONGC (exiting PSUs) are some of the stocks that Emkay removed from of its model portfolio. 

It added Hero MotoCorp, Maruti Suzuki, Hindustan Unilever, Nestlé (mass consumption theme), Infosys, Shree Cement (defensive, relatively low multiples). Also, it increased weight to Reliance to replace ONGC's.