Nomura Pegs Nifty 50 At 18,150 By December, Picks Top Bets For 'Volatile' 2022
Nomura said it prefer sectors and stocks with potential improvement in their growth outlook versus current expectations.
Uncertainties around rate hikes by global central banks and India's growth outlook beyond the pandemic will keep volatility high in 2022, capping the upside for domestic equities, according to Nomura.
Liquidity tightening is largely expected, but its pace can be faster than expected, the brokerage said in its India Equity Strategy Outlook 2022 report. The central banks, it said, are now more worried about inflation and less concerned over growth. "Rising inflation expectations, tight labour market and supply constraints are increasingly making central banks hawkish."
Besides, for India, economic growth beyond the pandemic is another key macro variable, Nomura said. "There is a strong recovery from the early impact of Covid-19, but many economic indicators are currently trending below the pre-pandemic growth path. India’s potential growth rate is possibly set lower and is impacted by weak consumer sentiment and continued disruptions from the pandemic."
Nomura forecasts GDP growth to slow down to 5.1% in 2023 from 8.2% in 2021 and 7.4% in 2022. Its Nifty target for 2022 is 18,150.
The largest drag on growth, it said, is consumption on the demand side and the services sector on the supply side. "Consumption has not fully recovered as real consumption in September 2021, on a seasonally adjusted basis, was 2.5% below the pre-pandemic quarter of December 2019. The services sector typically accounts for about 40% of the workforce in India and hence, weak demand for services can feed into weak consumption demand."
Nomura has a target of 18,150 for Nifty 50 for December this year, based on a valuation of 18.5 times estimated earnings for December 2023. The benchmark is currently hovering around 18,200.
Earnings Growth To Fizzle Out Sans Economic Growth
Corporate earnings, Nomura said, are recording a strong revival led by pre-pandemic efforts on cost control and disciplined capital allocation, as well as post-pandemic impact of market share gains, higher commodity prices and lower costs.
As a result, profitability is improving, leading to a rise in the earnings-to-GDP ratio.
Over the next 12 months, Nomura expects the market to focus on earnings growth beyond FY24. "With an improvement in profitability playing out, earnings growth beyond FY24 will depend increasingly on the broader economic growth."
Top Picks And Themes For The Year Ahead
Amid the current liquidity conditions and valuations in the markets, Nomura said it prefers sectors and stocks with potential improvement in their growth outlook versus current expectations.
The brokerage is 'underweight' on domestic and global cyclicals and 'overweight' on defensives.
It's overweight on IT and related services, telecom and healthcare, citing growth outlook and upward earnings revision.
In consumption, Nomura prefers staples over discretionary.
It also prefers auto ancillaries to play on electric vehicles over going for original equipment manufacturers.
Overweight on infrastructure and construction stocks, considering the policy focus on investment-led growth and India’s digitisation opportunity.
Selective in financials with a preference for large private banks with lower valuation, insurance, and housing finance NBFCs.
Underweight on metals and neutral on oil and gas.
It also listed its top 'buy' picks for the year:
Infosys Ltd.
Axis Bank Ltd.
Larsen & Toubro Ltd.
SBI Life Insurance Co.
Lupin Ltd.
Bharti Airtel Ltd.