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Outlook 2021: Bull market driven by 'discount rate'

Mean reversion of ‘PAT/GDP’ and long term outlook; drivers of near term aggregate demand still weak!

Outlook 2021: Bull market driven by ‘discount rate’
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Outlook 2021: Bull market driven by ‘discount rate’ 

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Mumbai: Here is a comprehensive analysis of the securities, precious metals and commodities performance in the year 2020 vis a vis the outlook for the coming year 2021.

Indian equities have entered a bull market environment as evidenced by the one year rolled forward P/E at 22x rising beyond the peak of FY08 at 20x on an 'ex-ante basis' and significant broadening of the market rally by market cap size and various investment styles (Dividend yield, PSUs, High Beta, Small caps etc). CAPE although expensive at 26x (+1 s.d.) is still lower as compared to its peak of 34x in FY08. Valuation on P/B at 3x is close to the LTA and does not indicate overvaluation, although it does reflect low ROEs. On a cross asset basis, Gold outperformed the most, followed by mid/small caps in CY20.

Bull market environment is expected to prevail in CY21. This could take Nifty50 to 14,900 levels. However, if market bullishness reverts to average sentiment, the base case fundamental value is ~13,500, which indicates flat returns for CY21. If a risk-off environment materialises, we expect NIFTY50 to touch 11,600 on the downside.

Top picks: Large caps - SBI Life, ICICI Lombard, Axis Bank, HDFC Bank, NTPC, Cipla, Bharti Airtel, Ultratech, Infosys, Dabur, Bajaj Auto; Midcaps – GGL, Balkrishna, Alkem, Astral Polytechnik, Akzo Nobel; Small Caps - Greenpanel, Heritage foods, Bajaj Consumer

Discount rate and long term outlook will drive the P/ E expansion. The current P/E multiple expansion is driven by rising risk appetite (lower equity risk premium as evidenced by falling CDS spreads) due to record QE program of global central banks and prospects of Covid vaccine, which along with lower interest rates (risk-free rates), is driving down the overall 'discount rate' for equities.

Long term growth value is improving. Policy reforms by the government towards making India attractive as a global manufacturing hub (lower taxes, labour reforms, ease of doing business, digitalisation) are improving the long-term demand outlook which is reflecting in the expansion of the 'market implied long term growth value' of the NIFTY50 to 57 per cent despite a fall in discount rate as explained above.

Mean reversion of 'PAT/GDP' ratio, which hit a two-decade low of less than 3 per cent, is helping augment earnings/cashflow outlook. We expect NIFTY50 earnings to grow at a CAGR of 19 per cent over FY20-23.

Earnings growth expectation over FY20-23 is largely driven by normalisation of depressed earnings by corporate banks, telecom, auto, commodities and pharma sector.

Margin expansion to slow down as input costs rise and volume growth will be the key earnings driver in CY21, which will have its underpinnings on aggregate demand revival. Top line growth expectations, which reflect aggregate demand, are low to moderate.

Economic outlook: Near-term growth impulses are currently still weak with households preferring savings over consumption. Government spending constrained by weak financial resources, and corporate sector deferring capex and cutting opex. Some of these challenges will reverse in CY21 due to aggregate demand normalising, pent-up demand, and improving resource mobilisation by the government.

We expect economic activity levels to normalise to FY20 levels in FY22 (GDP growth: FY21 -7.5 per cent; FY22 +8.5 per cent) and the INR to be fairly stable within the 73-75 range. Exports are expected to grow 13 per cent in CY21 after dropping 11 per cent in CY20. Price levels (CPI) are also expected to be stable within the 4-6 per cent range in CY21. As per early ENSO forecasts there is little probability of El-Nino condition in CY21 which should augur well for monsoons.

(Courtesy: ICICI Securities Limited)

Market breadth improving


Rising risk appetite reflecting in declining CDS spreads



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