BofA Securities Expects Nifty 50 To Drop 10% In Near Term

“Once the market rallies over 75 weeks, generally the momentum weakens. We are in the 74th week and average returns are about 106%, we are already at 120% returns,” Amish Shah, India head of research at BofA Securities, told BloombergQuint’s Niraj Shah in an interview. “Obviously that’s not a fundamental analysis, but this is what the trend suggests from the past cycles as well.”

“For the headline index Nifty 50, our target is 15,000 for the year end, implying about 10% downside from where we are.”

Taper Impact

Federal Reserve’s Chair Jerome Powell late on Friday said the U.S. central bank could slow down asset purchases this year, but it won’t be in a hurry to raise interest rates. “The timing and pace of the coming reduction in asset purchases will not be intended to carry a direct signal regarding the timing of interest-rate liftoff, for which we have articulated a different and substantially more stringent test,” Powell had said his virtual speech.

While Powell didn’t reveal exactly when the taper would begin this year, Amish Shah, in his interview prior to Fed chair’s speech, had said it could “predominantly happen by November”.

“And if the taper indeed does happen by November, then the markets may start to have a pullback quite immediately,” Amish Shah said.

Sector Outlook

According to Amish Shah, it is prudent to “hide in defensives” when the market corrects. “Once the markets have corrected, our preference is obviously to own the cyclicals, which is, particularly financials and industrials. Technology, we are overweight as well.”

The consumer discretionary sector, he said, is the most at risk from a near-term correction as it’s highly exposed to commodity costs. “In an environment where demand is relatively subdued, the ability to take price hikes to completely pass on cost pressures is not there.” That, coupled with a very high consensus earnings growth estimates and pricey valuations, puts the sector at a “great risk”.

• Overweight on technology, financials, industrials, staples, IT, utilities, healthcare.

• Neutral-weight on telecom.

• Underweight on materials, energy, consumer discretionary.

PLI Factor

A progress due to the government’s production-linked incentive scheme is already visible in several sectors, Amish Shah said, as several bottom-up themes became attractive.

He, however, reiterated the general preference to rebalance towards large caps due to rising concerns over small- and mid-cap companies with poor fundamentals.

Capex Cycle

According to Amish Shah, India is just beginning a multi-year capex cycle. He said the current phase in the market is similar to the 2003 moment—the last capex upcycle.

The government’s efforts to open up monopolies would attract a lot of private capital in sectors such as highways, power generation, airports, renewables, and power transmission, he said. That, according to him, would lead to an increase in capital expenditure in these under-invested sectors.

Watch the full conversation here: