BofA revises Nifty target to 16,000 from 17,000, cites faster rate-hike risks

BofA has revised to 16,000 from 17,000 the Nifty target for the end of the calendar year 2022, citing a faster than expected interest rate hiking cycle by the US Federal Reserve.

The brokerage house also said in a negative scenario, the Nifty's valuation multiple can shrink to 15.8x (LTA) with its target at 13,700 points, implying a 15 percent downside from current levels.

"We expect front-loading rate hikes in the US with 50bp hikes in June and July likely to follow the 50bp hike in May; inflation beats (BofAe CPI of 6.8 percent YoY in FY23 vs RBI's 5.7 percent) and rate shock (recent off-cycle 40bps hike) in India," BofA said in a recent report.

Any easing of volatile crude prices, turnaround in foreign institutional investment (FII) flows and bottoming of the Indian rupee could be an upside risk, it said. Global inflation prints coming ahead of estimates and resulting in faster than anticipated rate hikes is the key downside risk, the brokerage house warned.

BofA estimates rural demand could now be close to a bottom, with a recovery likely in one or two quarters.

The brokerage also turned more defensive and raised staples to an "overweight" view from "underweight". It said autos, NBFCs and cement as major sectors exposed to the theme. It also highlights exposed stocks, including Mahindra & Mahindra, Hero MotoCorp, Escorts, Ultratech Cement and M&M Fin.

"Our analysis suggests robust rabi production, normal monsoons likely driving good kharif yields, coupled with elevated agriculture prices (above MSP in most cases) and government subsidies curtailing cost pressures, could mean 10-12 percent YoY rise in net farm incomes. Further, front-loading of infrastructure spending could also boost non-agriculture incomes, with wages also stabilizing", BofA added.

It reiterated marginal overweight skew on autos. It expects 3-5 percent industry growth for tractors from earlier expectations of a decline in FY23.

It also sees a ray of hope for the 2-wheeler industry, especially entry bikes with a 7-8 percent growth after three consecutive years of decline.