BOFA Securities downsizes Nifty target to 17,500 levels

Bank of America Securities cut its Nifty target by 1,000 points for the year ending December 2022. The original target for the Nifty was 18,500, which has now been revised lower to 17,500. Broadly, the broking house has blamed this downgrade on a number of factors. Here are a few of the key factors driving this downgrade.

a)    The first factor highlighted by BOFA Securities is weakening macros. That is evident even from a very cursory reading of the Indian macros. IIP has dipped into negative in the month of August and inflation has bounced to 7.41% in September 2022, despite a lot of hawkishness shown by the RBI. All these are quite disconcerting.

b)    The second reason proffered by BOFA Securities is the weakness in the rupee. The rupee is now at 82.40/$ and the USDINR futures indicates at further weakness with the rupee going to the range of 83-84/$ during the course of this year. That has been triggered by weak exports, high trade deficit the potential for a rise in the current account deficit.

c)    Global slowdown including the slowdown in China is another reason proffered by BOFA Securities for this downgrade. For instance, the IIP data for August indicates that the negative cues are coming from the export oriented sectors. In addition, weakness in China due to excess COVID caution, is not only disrupting supply chains but also hitting demand and the price of metals. All these are negative for India, not to forget the possible impact on the rupee of a weakening of the Chinese Yuan.

How credible are such downgrades of the Nifty really?

That is a million dollar question. Globally, fund managers have struggled to identify and invest in stocks that beat the index. Globally, nearly 85% of the fund managers fail to beat the index and that trend is gradually coming into existence in India also. When it is tough to find a handful of stocks that can beat the market, it would be naïve to believe that any brokerage houses, even with the most qualified analysts, would be able to predict the Nifty or the Sensex with any degree of credibility. We are not talking about a stock but an amalgam of 50 stocks, which is what the Nifty is. Let us look at some more data points.
Just look at this chronology of downgrades of the Nifty by BOFA Securities during the current year.

●  In February 2022, BOFA Securities slashed the Nifty target for the year ending December 2022 by 2,100 points from 19,100 to 17,000. It downgraded autos to underweight, and autos were among the star performers in the first half of the year 2022.

●  In June 2022, BOFA Securities downsized its year-end target for the Nifty  from 16,000 levels to 14,500 levels (a downsizing of a full 1,500 points). That was the point of pessimism in Indian markets amidst record FPI outflows.

●  Now in September 2022, it has cut the Nifty target to 17,500.

What is the moral of the story? Nobody has even the slightest clue about where the Nifty would be at the end of the month; leave alone the end of the year. Of course, such reports do make for some very fascinating reading as they show how optimistic analysts can be about their ability to predict index levels, even in the midst of stark uncertainties.