Bank of America upgrades Indian market outlook, sees Nifty at 20,500 by December

The Bank of America has upgraded the outlook for the Indian market and said it sees Nifty hitting 20,500 points by December, citing stronger domestic inflows and no risks of recession in the US.

This comes a week after Morgan Stanley upgraded the Indian equities market to the number one slot among emerging markets (EMs) in Asia, excluding Japan, and going past Korea and the UAE.

Bank of America (BofA) analysts see the domestic market riding on large and mid-cap stocks from the financial, industrial, auto, staples, and pharma stocks, where it is overweight and cautious/under-weight on IT, utilities, materials and discretionaries.

"We see Nifty at 20,500 points by December, as we don't see a recession in the US, ensuring fund flows and strong domestic inflows on any correction," BofA said.

Nifty valuations could overshoot its long-term average of 19,000 points, it said.

Explaining the rationale behind the re-rating, BofA said historically Nifty's returns have mostly been positive at least three months prior to the end of US recession as well as during the phase of Fed's penultimate rate hike to six months after the start of rate cuts.

Another reason is domestic inflows, which could continue to be robust, while a third of Nifty market cap is still below long-term average valuations, a few of which offer buying opportunity, it said.

On the downside, it said the market may drag in the near term, given the risks from the recent rise in crude and the inflation spike led by erratic rainfall and commodities rally on potential China stimulus.

But the impact of these factors maybe transient, or not significant, BofA said, advising buying on any potential dips.

Also, any contraction in Nifty valuations can see significant active inflows for domestic institutional investors, thereby limiting the downside, it said.

However, the report sees major market risk coming in from the forthcoming general elections and less from the US.

After recent cuts, the street has tempered down earnings expectations to 17 per cent for 2024-25 and 2025-26, slightly lower than the previous 18-19 per cent.

The report notes that Nifty has rallied 15 per cent between March and July this year.

The August 3 report by Morgan Stanley saw India jumping five places in its list.

India now becomes our core overweight market within our Asia basket, except Japan, as valuation premiums to the EM and China have moderated significantly from last October's high and started to spike again, Morgan Stanley said in the report, which also downgraded China.

The report mentioned that Nifty has rallied 15 per cent from March 2023 lows up until the very end of July.