Expect equity market volatility, muted returns in 2023: Bank of America Securities

Equity market investors have had a roller coaster ride over the past 12 months. From hitting a 52-week low of 15,183.40 (NSE Nifty50) to touching a new life high of 18,887.60, investors have seen it all in 2022. Amid high inflation and interest rate hikes by major central banks, including the Reserve Bank and US Federal Reserve, the benchmark stock market index swung 20 per cent in 2022.

Indications are that 2023 will be volatile too, with worries over the extent of the US recession, the pace of monetary policy tightening, and the impact all these will have on emerging market economies, including India.

“During the calendar year 2023, we expect continued volatility. Nifty could range from 17,000-20,000 led by debate on two scenarios of a protracted global revival or a soft landing, and despite the volatility, Nifty could deliver muted but a positive return,” said Amish Shah, managing director and head of research – India, Bank of America (BofA) Securities.

It has a December 2023 Nifty50 target of 19,500, implying a roughly 5 per cent upside to its close of 18,608, on December 13, Tuesday. Buying on dips and being tactical on sectors could help investors generate better returns, said Shah.

If inflation remains sticky and global growth is a drag for long, then there could sharp cuts to Nifty 50 earnings growth for 2023-24 and 2024-25, says BofA Securities. In this kind of a scenario, the Nifty could fall to 17,000 levels. However, in case of a soft landing (sharper correction in inflation, Fed cuts rates earlier, the US just skirts inflation), then the Nifty index could trade at 20,000 levels, BofA expects. Compared to Nifty’s closing levels on December 12, that is an upside or downside of around 8-9 per cent.

Since October 2021, foreign institutional investors (FIIs) have sold equities worth $28 billion and their ownership of Indian stocks (NSE 500) has declined from 23 per cent in December 2020 to 18 per cent in September 2022, the investment bank noted.

The valuation of Nifty50 is at a 10 per cent premium to its long-term average. In 2023, the expectation is that other emerging markets, where valuations are cheap, could see higher FII flows, and India could underperform. However, India is still expected to outperform the developed market equities.

While FIIs have been net sellers, strong domestic inflows are providing the downside support for Indian stock markets. BofA’s conservative estimate is that flows from EPFO (Employee Provident Fund Organisation), NPS (National Pension Scheme) and SIPs (systematic investment plan) into mutual funds could contribute at least $20 billion of money into the market next year. Over the last two financial years, household savings into equities have gone up from 4 per cent to 8 per cent.

“Slowdown in the US and global economy, Fed pivot, strengthening Chinese yuan, higher crude ($100 average), China re-opening along with geo-political uncertainties driven by Russia-Ukraine, China-Taiwan are key events to watch for the year ahead,” said Shah.

There will be spillover effects of a US recession on India’s economy too as exports will take a hit. That, plus possibly higher crude oil prices, could stretch India’s current account deficit. However, Shah notes that past experience shows economic slowdowns or even recessions in the US are less protracted for India and the recovery has been quicker for India.

Near-term headwinds notwithstanding, BofA remains constructive on India over the long term.

“We see six structural themes likely to play out in India over time: rapid infrastructure ramp up, de-carbonisation, curtailing imports/stepping up exports, opening government monopolies, improving tax compliance, rising digitisation and financial inclusion. Besides, favorable policies also augur well for ambitious long term exports push,” said Shah.

The investment bank remains overweight on banks (asset quality improvement, earnings visibility) and industrials (capital expenditure spends will aid order inflows). Banks, especially state-owned, have run up quite a bit this year. But Shah of BofA expects this run to continue into 2023 as well.

The investment bank also expects consumer staples companies to do well. While urban/premium demand is resilient, any uptick in rural demand could surprise earnings on the positive side, said Shah. It is also overweight on sectors like metals and cement. Both of these could get a boost from capex spends.
The cement sector is a big beneficiary of the government’s infrastructure spends.

BofA, on the other hand, is underweight on sectors like automobiles, healthcare, consumer discretionary and information technology.

“With global economy slowing down, visibility on IT spending remains low, which could reflect in earnings growth,” said Shah.
In healthcare, he said concerns about core earnings “continue to linger” on the erosion of pricing of generic medicines in the US market.

Valuations in auto and consumer discretionary sectors are above their average, which does not provide comfort, BofA noted.