Nomura predicts 12% increase in Nifty this year; what will drive the rally?
The baseline scenario incorporates the expectation of sustained disinflation and a decline in yields, a moderate global economic growth deceleration, favorable oil and commodity prices, and a positive outcome in the 2024 general elections.
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Nevertheless, India faces substantial risks in the form of prolonged elevated commodity or oil prices and unfavorable election results. On a global scale, the potential scenarios of either a scenario with no economic downturn (characterized by robust growth, persistent inflation, and higher yields) or a hard landing (marked by sharp declines in growth, inflation, and yields) may lead to increased risk premiums and diminished valuations.
“Globally, the scenarios of no landing (strong growth, sticky inflation and higher yields) and a hard landing (sharp fall in growth, inflation, yields) could lead to higher risk premium and lower valuation. Such a correction would be a buying opportunity, in our view, particularly if a growth slowdown or recession in the US is a clearing event, reducing macro uncertainties. This could set the stage for a revival in mass consumption and private capex, in our view,” it said.
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Nomura considers such corrections as favorable buying opportunities, particularly if a slowdown or recession in the United States resolves macroeconomic uncertainties, potentially triggering a resurgence in mass consumption and private investment.
Nomura projects a robust 20 percent Compound Annual Growth Rate (CAGR) in corporate earnings for Nifty 100 from FY19 to FY24, marking a substantial increase compared to the mid-to-high single-digit growth witnessed in FY15-20.
The ratio of corporate earnings to GDP, which experienced a decline after the Global Financial Crisis (GFC), rebounded to 8.8 percent in FY23, recovering from a low of 4.6 percent in FY18. Notably, the financial sector played a pivotal role in this resurgence, and other sectors also exhibited significant improvements in profitability.
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In the past nine months (April to December), Nifty50 earnings have consistently met expectations for FY24/25 estimates, in contrast to historical trends. Nomura envisions that India’s medium-term corporate earnings will maintain a robust growth trajectory, ranging between 12 percent and 17 percent.
This sustained growth is expected to be driven by increased private capital expenditure, a surge in exports, and support from government policies promoting domestic manufacturing. Looking ahead to FY25/26, Bloomberg consensus earnings growth estimates for Nifty 100 at 12.2 percent/12.5 percent align with the lower end of Nomura’s medium-term earnings growth expectations.
“We see near-term earnings risk as modest, which can be due to slower growth and higher commodity prices vs current expectations. With a pickup in private capex and exports, we think earnings growth could accelerate in the medium term,” the report said.
Nomura’s stock suggestions
Nomura has adopted a discerning stance on the automotive sector, while maintaining a lower weighting on consumer discretionary/durables, capital goods/defence, metals, internet, and IT.
Among its favored large-cap selections are ICICI Bank, Godrej Consumer, Mahindra & Mahindra, L&T, and Reliance Industries (RIL).
Within the small and midcap realm, the brokerage has singled out Coforge, Lupin, Medplus, Dalmia Bharat, Federal Bank, and Sansera Engineering as its top choices.
“We are selective and slightly defensive given the run-up in valuations in the recent past. The expectations on the growth-inflation balance are extremely sanguine. Any deviation from this optimum can set a risk off in the backdrop of higher debt and fiscal deficits post the pandemic. Our Economics team’s expectation is of slower growth across markets vs consensus. We prefer domestic plays,” Nomura said.
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Published: 05 Jan 2024, 09:20 PM IST
