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Jefferies 10 mean reversion scenarios put Nifty December 2022 target at an average of 17,500 with the range being 16.5k-18.5k, as unwinding of the global liquidity calls for mean reversion on valuations. Key near-term risks include LIC IPO amidst continued foreign selling ($20 billion since April'21), a perception that the RBI might be behind the curve amidst the twin deficit concerns, as per the global brokerage.

“Under different scenarios, Dec-22 target for Nifty comes to 16.5-18.5k with a mean of approx 17.5k implying almost flat markets for the rest of the year," the note added.

RBI's continued pause on headline rates and a surprisingly low CPI forecast for FY23 has bought the RBI a few months of time. The recent crude oil spike, meanwhile, could result in a Rs6-8/ltr hike in auto fuels, once the state elections get over in early March. These hikes, would add about 30-40bps to the CPI. Potentially higher CPI might drive RBI to change its dovish stance over the next 1-2 quarters.

The ample global liquidity scenario is already under threat as high inflation is prompting policy reversals. The Fed may also shrink its balance sheet by possible active sale of its book in addition to the run-off. Record inflation in Eurozone has also raised question mark on need for QE by the ECB. Since Apr'21, FPIs have sold $20 bn in the secondary market, Jefferies highlighted.

“India is seeing the prospect of 'twin' deficit - fiscal and CAD - simultaneously over the next 12 months. Meanwhile, the centre's 6.4% FY23 fiscal deficit target has already caused concerns in the bond market," the note stated.

Source: Jefferies
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Source: Jefferies

The brokerage has lowered its Nifty target to 17,500. Heavy foreign selling has been absorbed by strong domestic buying smoothening the market impact. “Potential LIC IPO can disrupt this balance. We remove Ambuja on continued margin pressures in the cement sector. Hindalco is meanwhile benefiting from structural shift to aluminum from steel in autos, and from plastics and glass in beverage cans at Novelis, and higher aluminum prices in India business," Jefferies added.

 

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