Markets
US recession imminent, time to book profits: BofA Securities
Summary
- Nifty50 expected to fall to 16000 levels
Mumbai: The US Federal Reserve's recent quarter percent (0.25%) rate hike has deepened concerns over a potential slowdown and recession in the US. A report by BofA Securities, released on 4 May following the rate hike, suggests that a recession may be imminent.
The brokerage has forecast a decline in the Nifty index to 16,000 levels and recommends booking profits, as they see no upside to their year-end target of 18,000 for the index.
Historical analysis of the past two recessions in 2001 and 2007 by the brokerage indicates that the S&P 500 index tends to fall between 20% and 40% after the onset of a recession. The Nifty index, which often mirrors the S&P 500's performance, experiences a smaller decline. The S&P 500 index tracks the stock performance of the 500 largest companies listed on US stock exchanges.
BofA Securities has cited global slowdown, volatile commodity markets, peak urban demand, and slow rural revival as risks to earnings growth, expecting continued cuts to consensus earnings growth estimates for FY24 and FY25.
The brokerage's FY25 estimated earnings per share (EPS) is similar to the market's FY24 estimated EPS, and they predict that the Street's lofty estimated EPS growth of 17% and 16% for FY24 and FY25, respectively, for the Nifty will be cut by 40%.
Weak earnings resulting from the global slowdown are already evident in the IT sector. The brokerage sees additional risks from a delayed rural revival, a potential peak in urban demand, and volatile commodities posing risks to margins revival, coupled with the US recession.
During past US recessions, India's GDP growth has contracted an average of 190 basis points, while export growth has sharply declined from double digits to low single digits, according to the brokerage.
Epectations for the first Fed rate cut in September 2023 may lead to disappointment and drag markets during the second half of FY23. BofA Securities estimates that the US Federal Reserve will cut interest rates in March 2024. The brokerage said that an easy policy and tightening credit is the worst phase for stocks and is typically seen in a recession.
BofA Securities has advised investors to consider buying into potential market dips, as the Nifty index is likely to fall to 16,000 levels, which represents an approximately 11% downside.
