Bank of America (NYSE:BAC) provided today its analysis on the Nifty 50 correction, which has been unfolding as predicted since August 2024.
India's benchmark stock market index reached its peak in September 2024 and have since experienced a deeper correction, particularly in state-owned enterprises (SoEs), stocks with low float, momentum plays, and mid/small caps, with declines ranging from 13% to 34%, Morgan Stanley (NYSE:MS) analysts noted.
Despite some investor optimism about improving macroeconomic indicators, corporate earnings, and capital expenditure (capex) growth, Bank of America maintains its expectation of single-digit returns for the Nifty in the calendar year 2025, with high volatility comparable to bond returns but with equity risks.
"We continue to expect single digit returns for Nifty in CY25 with reasonably high volatility implying bond returns with equity risks, and expect SMID caps to see negative returns," Bank of America analyst Amish Shah wrote in a note.
The analysis highlights several risks that are believed to be well established but not yet fully realized in the market. These include continued earnings downgrades, with Morgan Stanley's FY26 Nifty earnings per share (EPS) growth estimate at 12%, which is below the consensus of 15%. Factors such as weaker capex, credit growth, and commodities are expected to contribute to the majority of this discrepancy.
Furthermore, policy uncertainty in the United States, including trade, immigration, fiscal, monetary, and geopolitical policies, is seen as a significant risk for India's market volatility. India's trade relationship with the US, although less impacted by potential trade wars, remains a key risk due to its reliance on service exports.
Bank of America also forecasts a moderation in capex growth from a strong 20% compound annual growth rate (CAGR) over the past three years to an estimated 13% CAGR from FY25-27. This slowdown, attributed to the government's shift towards balancing capex and consumption, could negatively impact overall economic growth.
Foreign institutional investor flows are expected to remain weak, contrary to expectations of a revival, due to factors such as strong US bond yields, potential rupee depreciation, delayed Federal Reserve rate cuts, and robust US equities. Domestic institutional investor flows also pose a risk, as they have contracted since peaking in October 2024.
Lastly, the report points to the challenge of justifying valuation expansion for the Nifty, which is trading close to its long-term average, in an environment of slowing economic and corporate earnings growth. This could result in single-digit returns that align with earnings growth.
Mid and small caps, which are still trading at a premium, may continue to see valuation contraction as their earnings growth is projected to lag behind the Nifty's.