Global investment advisory BNP Paribas expects Nifty to see a modest gain of 8 per cent in FY24 amid headwinds.

“We keep our bottom-up approach to stock selection for our model portfolio. Key themes underpinning our thesis: Structural growth stories - IT (OW) and Telecom (OW); Cyclical plays - Financials (OW) and a tactical buy - Consumer Durables (OW),” the report said.

The investment advisor remained cautious on Industrials (UW) and the overall consumption space (Autos, Consumer Staples and Discretionary) on valuation/demand concerns.

“Considering the 10-year G-Sec yield at 7.2 per cent, earnings yield gap at 1.6 per cent and FY25 EPS of ₹1,076 (5 per cent below March 2024 consensus expectation), we arrive at a Nifty index target of 19,250 by March 2024,” BNP Paribas said on Thursday.

The lag effect of interest rate hikes should weigh on global growth even as the worst of inflation seems behind. China’s reopening and an increase in term deposit rates are likely to impact the flows into Indian equities., Kunal Vora, India Equity Research, BNP Paribas, said in the report.

FII outflow to continue

FII holdings in the Indian market are close to the lowest in a decade. “With China reopening and India’s elevated valuation premium, we see a risk of FII outflows continuing in 2023. Amid foreign outflows of $17 billion in 2022, domestic inflows have been a key driver for Indian equities. While Systematic Investment Plan (SIP) flows remain resilient, retail inflows have moderated since June 2022, also coinciding with the rise in term deposit rates,” it observed.

Consensus earnings CAGR of 16 per cent over FY23-25 is factoring in margin improvement in FY24 in each of the 21 sectors, it said. However, “historically, consensus earnings estimates have been lowered by 10-25 per cent through the course of the year with an exception being the period after the pandemic,” the report further said.

Some more correction

“We continue to track the bond yield vs earnings yield gap closely and at the current gap of 2 per cent we have historically seen negative market returns over one year. India’s valuation premium to Asian peers has come off from the peak, but remains well above historical average. Since 2015, as interest rates moderated, we have seen a large P/E expansion in the Indian market and we think correction is likely to continue for some more time.”

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