Nifty Target Price: Nifty can head to 16,900 levels by the end of 2022 even as inflation and growth prospects remain a concern.
“It’s a bit tricky but the balance is between how India’s growth plays out and how inflation plays out,” Mukherjee, managing director and India equity head.
“I think that equation still presents a scenario where you could get an index level which is higher than where it is today.”
Inflation concerns in India are now “abating” as commodity prices have started coming down, he said. “We are seeing commodity prices cooling off; that, in effect, can also cool down inflation expectations going forward.”
The Indian stock benchmarks have advanced, aided by gains in metal, consumer durables, realty, banking and information technology stocks. On July 7, the Nifty index closed above 16,000 for the first time in four weeks since June 10.
“At the margin therefore, we think the immediate concern on inflation may come down and that could be the reason why we are seeing some sort of a relief rally in the market.”
However, macro variables remain a concern
Nomura has lowered global growth expectations, especially in key markets like the U.S., Europe, Australia, and South Korea, which may also have implications for India, he said. “We are forecasting sequentially the growth rates to be in the negative territory starting end of this year.”
Even as the government is hiking interest rates to beat inflation pressures, Mukherjee expects valuations to be unaffected by further increases.
“Interest rates in the system are already quite elevated compared to the other parts of the world, so to that extent a 100 basis point or 150 basis point would contract valuations but it is less sensitive,” he said.
According to him, growth is the key variable for markets, as it “will be a lot more sensitive around growth expectations going forward”.
While the earnings yields were expensive in May as compared to bond yields, the higher interest rate outlook now seems to be priced in at the current levels after the market correction.
As commodity prices come down and inflation expectations start to cool off from current levels, Nomura is “less concerned about the impact of rates on valuations at this point”. While the valuations aren’t “attractive or cheap”, they aren’t “elevated” and currently lie in the “fair zone”.
However, risks to earnings are more elevated than they were a month back, he said.
Mukherjee prefers large caps over mid-cap stocks. But with a bottom-up approach for medium and small caps, some stocks may do well, especially the ones that have “corrected sharply”.
Nomura is positive on financials, infrastructure/industrials, and pharmaceuticals. It remains cautious on consumption, particularly the discretionary consumption sector, metals, and cement.
“Though valuations have come off from the peak in IT services, we are neutral as we factor in risk from a global slowdown,” it said in a note.
The financial services company’s top picks are ICICI Bank Ltd., State Bank of India, Larsen & Toubro Ltd., Mahindra & Mahindra Ltd., Bharti Airtel Ltd. and Sun Pharmaceutical Industries Ltd.—all of which are rated a ‘Buy’.