INSUBCONTINENT EXCLUSIVE:
2023 could be another volatile year for Indian equity markets, according to BofA
In a report, the brokerage pointed out that the Nifty50, at present, is trading at 20.7x against its long-term average of 18.8x one-year
forward earnings of current Nifty constituents
Plus, India is trading at a 98 per cent premium to its emerging market (EM) peers against its long-term average of 45 per cent
" We can debate the quantum of it but markets are expensive whichever way we cut it
And that is one of the worries we have," said Amish Shah, head of research, India, BofA Securities
Moreover, there could be material downgrades to the consensus earnings estimates for financial year 2022-23 (FY23) and FY24, the brokerage
External facing Nifty constituents, which constitute 21 per cent of the index, could lead to this fall, the brokerage said
"The world is slowing down, there is a risk of recession
There is a perfect correlation between India's export growth and the US and Europe's economic growth
Recessionary events in the US have meaningfully impacted export growth for India
Market upside will remain capped," Shah said
However, the Indian equity markets are unlikely to fall much due to strong domestic flows
Pension funds, insurance funds, and systematic investment plans (SIPs) could contribute at least $20 billion to Indian equities next year
Though sustained foreign portfolio investor (FPI) outflows could incrementally put pressure on markets, the potential for incremental
outflow is limited as FPI ownership is at a multi-year low
Moreover, household financial assets are witnessing a shift, with a higher proportion of savings allocated in favour of equities and small
savings, a move away from deposits
"FPIs will not do as much as they did in the last 12 months
Domestic investors will get at least $20 billion
On a net basis, the flows can continue to support
Markets are expensive and they will continue to be because of the flows," said Shah
On whether China's easing opening up will eat into flows to India, Shah said India and China do not compete for EM allocation and they are
FPI flows into the EM basket would imply inflows to India
"More than 90 per cent of the funds that invest in India are non-India dedicated funds
They can under allocate to India or even decide not to allocate, but cannot withdraw money
It is very unlikely, "Shah said, adding, "Markets will not have outsized corrections
Someone will go buy the dip on the back of these flows." Regarding sectors, Shah said financials, industrials, and metals could see upcycles
as they are trading at or below average valuations
And IT, materials, energy, and consumer discretionary could either see a reversal in the cycle or are trading at expensive valuations
On BofA's market outlook, Shah said it has a base case target of 19,500
And depending on how macro things play out, he expects Nifty to trade in the range of 17K-20K.
