In a note, the foreign brokerage said taper talks in the US, potentially higher US bond yields, firm
, consensus EPS cuts and recent muted IPO gains are negatively impacting retail investor sentiment and could act as negative triggers.
The brokerage said past bull and bear rallies suggest a typical run of about 75 weeks, providing an average 106 per cent return. After such rallies, BofA Securities said, markets typically correct about 30 per cent over a four-month period.
“The current rally has amassed a 118 per cent total return over 73 weeks. We see limited further runway in light of emerging risks in the near term,” it said. Nifty50, which hit a record high of 16,701.85 earlier this week, slipped below 16,400 in intraday trade on Friday.
“Increased retail participation (64 per cent of daily volumes since March 2020/post Covid against 45 per cent prior) has been one of the key contributors to the ongoing rally. However, muted gains within IPO listings recently pose a risk to levered retail positions,” BofA Securities said.
It said that valuations for Nifty50 are expensive at 19 times two-year EPS but it still prefers largecaps over mid and smallcap stocks.
Nifty’s valuation premium against midcaps and smallcaps has narrowed to just 9 per cent and 3 per cent, respectively, given the sharp outperformance of mid- and smallcaps, and the brokerage sees this trend reversing.
“With a cautious market view, we prefer largecaps in the near term. Also, any scale down of retail positions could put pressure on mid or smallcaps. Further, we prefer stocks where the Street has high confidence in EPS or low EPS dispersion,” it said.
It remained overweight on industrials, given its expectation of multi-year capex upcycle ahead. It likes financials on likely peaking credit costs and a pick-up in credit growth.
“Given that the rally in metals is likely near an end and the Fed tapering could put pressure on commodities, we cut materials to underweight from overweight earlier. With a cautious view on markets, we raise skew towards defensives in staples (from neutral), utilities and IT (overweight earlier) and maintain underweight on discretionary,” it said.
