BofA revises Nifty target from 19,100 to 17,000 citing rate hike risks

Note says market valuation shrinks if it is above long-term averages before the start of the hike cycle

BofA Securities has revised its Nifty target for December 2022 to 17,000, from 19,100, to price in the risks on account of rising interest rates and bond yields. The brokerage said it now expects a fast US Federal Reserve (Fed) hiking cycle.

"Our US economists are now expecting seven rate hikes in calendar year 2022 (CY22), starting March, and a further four hikes in calendar year 2023, of 25 basis points (bps) each. Also, there are concerns around a potential 50-bp hike in March, 100 bps by July, and inter-meeting hikes, among others. Within India, we expect the Reserve Bank of India (RBI) to hike by 100 bps by March 2023," said a note by BofA.

The note further said that market valuation contracts if it is above long-term averages before the start of the hike cycle. 

"Given the current market valuations, we think valuation contraction is likely," the note said.

However, the note added that there have been instances of Indian markets delivering positive returns during rate hikes by the RBI or the Fed, driven by earnings growth, even as valuations contracted.

"We believe India's corporate earnings could structurally outpace nominal gross domestic product (GDP) growth, led by the start of multi-year capital expenditure (capex)/credit growth/start-up cycles and 'growth-focused' fiscal and monetary policies," the note said.

The note added that India's CY22 earnings are likely the best among emerging markets. 

"A strong outlook is reflected in our macro analysts maintaining their views of 8.2 per cent real GDP growth in 2022-23," the note said.

The note said political stability is a crucial risk, the market's breadth is likely to narrow, and volatility could rise.

"We upgrade select defensive sectors having valuation comfort, like staples and health care. We maintain an overweight skew in favour of domestic and capex-focused cyclical, industrial, and financial. Contrary to perception, past cycles suggest limited risk to the capex cycle from rising rates," it added.