Bernstein Remains Neutral on Nifty, Expects 8-9% Return This Year

Bernstein Research has recently adopted a neutral outlook on India’s benchmark stock market index, predicting a modest return of 8-9% for the year. This decision comes amid a challenging investment landscape influenced by both global and domestic factors that play a significant role in shaping market sentiment and investor strategies.

The brokerage’s neutral stance stems from its view that the Indian equity market is fully valued at its current levels. Insights were gathered from discussions with over 100 global investors, many of whom expressed discomfort with current market valuations but remain invested due to strong domestic flows.

Despite the elevated valuations, cash levels among investors have not seen a notable rise, indicating a tendency to stay invested, largely due to robust domestic liquidity. The report highlights a general lack of enthusiasm across various sectors. Investors are showing limited interest in sectors such as Fast-Moving Consumer Goods (FMCG), Automotive, and IT services, primarily due to concerns regarding peak valuations and potential disruptions, such as the emergence of Electric Vehicles in the automotive industry.

Conversely, sectors like Telecom and Healthcare have attracted some interest, aligning with Bernstein’s positive outlook on these areas. The real estate sector, though facing challenges, continues to draw attention because of its growth potential.

Bernstein characterizes the current bull market as nearing the end of the “Acceptance Phase,” where high valuations have become standard, but rational investing still prevails. Signs of an “Invincibility Phase” are beginning to surface, marked by less scrutiny of business models and a shift toward high-risk, high-reward investments.

Despite these dynamics, Bernstein adopts a selective strategy, favoring specific stock picks across different sectors. While concerns about a potential U.S. recession loom, the brokerage believes that Indian markets are more vulnerable to domestic risks, including possible political instability from upcoming state elections, stagnant earnings upgrades, and increased subsidy programs that could affect the fiscal budget.

Bernstein notes that fears of a U.S. recession are likely overestimated at the present, suggesting that the Indian macroeconomic landscape will largely unfold independently. A decrease in commodity prices might actually provide support for the rupee and reduce the current account deficit.

The firm observes a slowdown in earnings upgrades for companies within the Nifty and Next50 indices, suggesting that the strong earnings growth seen previously may not continue at the same rate. Earnings revisions have been generous, permitting higher valuations than typically acceptable in previous cycles.

Ultimately, Bernstein’s neutral stance on the Nifty, accompanied by modest return expectations, reflects a balanced perspective. Ongoing domestic investment flows, particularly through Systematic Investment Plans (SIPs) and discretionary allocations, offer a buffer against potential market declines. However, the brokerage advises maintaining caution, emphasizing a bottom-up approach to stock selection rather than broad sector investments.