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BofA Securities warns markets may correct 9% near term, sees Nifty at 15000

BofA Securities sees risk of estimate cuts and with valuations at a peak, it expects markets to correct 9% near term with Nifty target at 15000. (Photo: Reuters) Premium
BofA Securities sees risk of estimate cuts and with valuations at a peak, it expects markets to correct 9% near term with Nifty target at 15000. (Photo: Reuters) 

  • Global markets have seen sell-offs by nervous investors this month due to rising covid cases and regulatory clamp downs in China. MSCI EM is down 1.72% and MSCI World is up 1.01%, while the Sensex and the Nifty have gained 5-6% in dollar terms

MUMBAI: Notwithstanding the massive surge in equities in the recent past, some investors have turned cautious. Analysts at BofA Securities have issued warnings on Indian equities fearing correction in the near term.

“Our analysis of past market rallies suggests the current rally could have limited further runway. We see risk of estimate cuts and with valuations at a peak, we expect markets to correct 9% near term with our Nifty target at 15000," said BofA Securities in a note on 20 August.

US Federal Reserve's taper talks, potentially higher US bond yields and the greenback, cuts in consensus earnings per share (EPS) estimates, recent muted initial public offering (IPO) gains hurting  retail investor sentiment could act as negative triggers, it said.

Analysis by BofA Securities of past bull and bear rallies suggests a typical run of about 75 weeks, providing an average returns of 106%. After such rallies, markets typically correct about 30% over a four-month period. The current rally has amassed 118% in total returns over 73 weeks, and hence it sees limited runway in light of emerging risks near term.

Global markets have seen sell-offs by nervous investors this month due to rising covid cases and regulatory clamp downs in China. MSCI EM is down 1.72% and MSCI World is up 1.01%, while the Sensex and the Nifty have gained 5-6% in dollar terms.

Overall, mid and smallcap indices have underperformed benchmarks this month. Both Sensex and Nifty have gained 5-6% while BSE Midcap index is marginally up while BSE Smallcap is down 2% in August so far.

Nifty's valuation premium versus mid caps and small caps has narrowed to just 9% and 3% of long term average, respectively, given the sharp outperformance of mid- and small-caps.

BoFA Securities expects this trend to reverse with a cautious market view, and hence prefers large-caps in near term.

“We remain overweight on industrials, given our expectation of multi-year capex upcycle and financials on likely peaking credit costs and a pick-up in credit growth. With cautious a view on markets, we raise skew towards defensives in Staples (from neutral), utilities and IT (overweight earlier) and maintain underweight on discretionary," BofA said.

Given that the rally in metals is likely near an end and that the Fed tapering could put pressure on commodities, BofA has cut materials to underweight from overweight earlier.

“Valuations for Nifty is expensive at 19 times 2-year forward earnings per share (EPS) or 8% premium to over two standard deviation levels. Emerging risks and likely estimate cuts could lead to a correction," BofA said.

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