Bank of America Outlook on India's Nifty 50 for 2025

Bank of America (BofA) predicts that India's Nifty 50 will yield less than 9% returns in 2025, with a year-end target of 26,500. The index may underperform U.S. equities in dollar terms due to high valuations and subdued earnings growth.

Current Performance

The Nifty is trading at 24,467, showing a 12.5% gain so far in 2024.

Earnings Growth Concerns

BofA anticipates slower earnings growth attributed to:
– Weaker contributions from commodities
– Reduced capital expenditure
– Sluggish credit growth
These factors are further affected by slowing economic activity, elevated policy rates, and lackluster urban consumption.

Market Volatility

Concerns around U.S. trade, immigration, fiscal, and geopolitical policies might increase market volatility, the brokerage noted.

U.S. Economic Projections

BofA's U.S. team expects stable GDP growth of 2.4% for 2025 alongside limited rate cuts and moderate crude prices, projecting an 11% upside for the S&P 500, potentially outperforming Indian equities.

Indian Government Capital Expenditure

Capital expenditure in India is expected to rise in fiscal 2025 following a period of stagnation during the election season. However, increasing welfare spending, which has a lower GDP multiplier compared to capital expenditure, could reduce fiscal flexibility amid slowing tax revenues.

Opportunities and Risks

Potential reforms in Goods and Services Tax (GST) and income tax simplification could provide opportunities, but legislative changes in land, labor, and power might encounter resistance. Delays in these reforms could pressure India's premium valuations.

FII and DII Dynamics

Despite foreign institutional investor (FII) ownership being at a decade low, BofA projects muted FII inflows in 2025 due to high U.S. bond yields, forecasted at 4.25% for the 10-year bond, and relative underperformance of Indian equities.

Domestic institutional investors (DIIs) provided significant inflows, with $8.6 billion recorded in October 2024; however, this trend may slow due to robust fundraising activities.

The alignment of FII and DII sector positions could increase market sensitivity to earnings surprises, elevating downside risks amid low earnings visibility, according to BofA.

Valuation Assessment

The Nifty remains pricey, trading 6% above its long-term valuation norms, even after a 7% decline. The bank concludes that future market returns are likely to closely mirror earnings growth.