Barring any major change in the global macro-economic and geo-political setup, Emkay Global Financial Services expects the Nifty 50 to touch 19,500 and Sensex to be at 64,500 by December 2023. Emkay's target for the Nifty 50 implies a potential upside of 7.7 percent for the current levels.

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The firm has cited some near-term headwinds to the Nifty 50's performance in the new year - First, valuations are not cheap compared to its own history, bond yields and to the MSCI-Emerging Market index. Nifty 50's current price-to-earnings ratio of 19x is at an 11 percent premium to its 10-year average of 17.2x and at a greater premium to its 15-year average of 16.1x.

The Nifty 50 is currently trading at an 86 percent premium to the MSCI-EM index, compared to the 10-year average of 45 percent. However, the firm expects the higher-than-historical price-to-earnings premium being sustainable based on India's GDP growth, China's slowdown, a structural reduction in India's equity risk premium aided by domestic flows, and a potential inclusion of India's bonds in the global bond indices.

Also Read: Here’s why 2023 may not be a very exciting year for investors in India's bluechip stocks

Second, geopolitical risks and a spike in crude oil prices count as potential headwinds. Higher-for-longer interest rates and a sudden rise in oil prices are challenges for the market in the next 6-12 months, according to Sanjay Chawla, the head of institutional research at Emkay.

Lastly, the movement of the US Dollar has its impact on multiple things and a higher greenback is always a cause of concern, according to Nirav Sheth, the CEO of Institutional Equities at Emkay. He expects the RBI to go on a period of prolonged pause by the April-June period of 2023.

On the earnings front, the Nifty 50's earnings surged 47 percent in financial year 2022 led by strong aggregate profits in the so-called low PE sectors like metals, energy (Ex-Reliance), Utilities and others. Emkay expects Nifty's earnings to normalise and mean-revert from the current financial year.

Bloomberg consensus expects the Nifty 50 Earnings per Share to grow 13 percent and 18 percent respectively in the current and upcoming financial year. EPS for the current year has been cut by 4.5 percent since the Russsia-Ukraine war while that for financial year 2024 has been cut by 3.2 percent. While Emkay sees limited downside risks to current-year earnings, it highlights a global growth slowdown, lagged impact of monetary tightening and waning pent-up demand as some risks to the earnings for financial year 2024.

Emkay's Model Portfolio

Emkay's EAP-Nifty model portfolio is benchmarked to the Nifty 50 index. The portfolio is:

Significantly overweight on banks and auto

Moderately overweight on insurance, cement, utilities and telecom

Underweight on IT, NBFCs, consumer staples and OMCs

However, for the Emkay Alpha Portfolio for small and midcap companies, the portfolio mix is skewed towards apparel, WSR and beverage companies, along with auto ancillaries. As of November 30, this portfolio was up 27 percent over a trailing 12-month period, compared to a 6 percent rise in the comparable BSE-400 index.

First Published:Dec 29, 2022 6:03 AM IST