‘Despite record highs, markets may correct 9% in the near term’

MUMBAI: Despite the stock markets hitting record highs this year, some investors have turned cautious on equities. In fact, even BofA Securities analysts have warned that a correction is likely in the near term.

“Our analysis of past market rallies suggests the current rally could have limited further runway. We see risk of estimate cuts and with valuations at a peak, we expect markets to correct 9% in the near term with our Nifty target at 15,000,” BofA Securities said in a note on August 20.

Talks of tapering by the US Federal Reserve, potentially higher US bond yields and dollar, cut in consensus earnings per share and muted gains for initial public offerings is negatively impacting retail investor sentiment and could act as negative triggers, it said.

Analysis of past bull and bear phases by BofA Securities suggests after a rally of about 75 weeks with an average 106% return, markets typically correct about 30% over a 4-month period. Considering that the current rally in Indian equities yielded 118% returns over 73 weeks, the brokerage sees limited further runway in light of emerging risks in near term.

Global markets have witnessed sell-offs by investors in August, following rising Covid cases and regulatory clampdown in China. While MSCI EM is down 1.72% and MSCI World is up 1.01%, Sensex and Nifty have gained 5-6% in dollar terms. Mid- and small-cap indices have underperformed the benchmark, while BSE Midcap index is marginally up and BSE Smallcap is down 2% so far in August.