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Bofa Securities highlighted a faster hike or tightening cycle by the US central bank as a key risk. A contraction in market valuations is likely, the brokerage says.
BofA Securities on Monday revised its target for the Nifty50 index to 17,000 from 19,100, citing "a fast Fed hiking cycle" that could lead to a contraction in market valuations.
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The brokerage highlighted a faster hike or tightening cycle by the US central bank as a key risk. It said the revised target for the 50-scrip index implies muted downside potential.
"Fed/RBI hiking cycles since 1994, suggests market valuations could contract. That said, past cycles also suggest market downsides are blunted if supported by robust earnings growth: India is well placed and is supported by ‘growth-focused’ fiscal/monetary policies," the brokerage said in a research report dated February 14.
Earlier that day, the Nifty nosedived three percent as escalating tensions between Russia and the West over Ukraine worried investors globally.
However, the next day, the 50-scrip index made a full recovery after Russia said it was pulling back some troops from its border along Ukraine, easing geopolitical tensions in the financial markets.
BofA Securities said a contraction in valuations is likely given the current levels. It lowered its target price-to-earnings multiple to 18.4 times incorporating an eight percent contraction.
Its economists expect a rate hike of 175 basis points by the US central bank in 2022 and 100 basis points in 2023. They see seven upward revisions in the current year itself starting in March, followed by four hikes of 25 basis points each in 2023.
BofA Securities expects the RBI to hike rates by 100 basis points by March 2023.
The report comes days after the central bank maintained a status quo on key rates and its policy stance following a scheduled, bi-monthly review. Experts viewed the RBI's February review to be dovish.
It, however, said it believes India’s corporate earnings could structurally outpace nominal GDP growth led by the "start/confluence of multi-year capex/credit growth/start-up cycles and ‘growth-focused’ fiscal/monetary policies".
(Edited by : Akanksha Upadhyay)