Corporate earnings growth, Covid vaccine to drive markets in 2021: Analysts

Markets are mostly pricing in most positives at the current levels, say analysts, who suggest the trajectory in the calendar year 2021 (CY21) will be guided by mostly by growth in corporate earnings. Those at Credit Suisse also caution against the expensive valuation at which the markets are trading at.

“Indian equities are no longer cheap: on price-to-equity (P/E) versus their own history, relative to global and EM equities, and versus domestic bond yields. We find the near-term cyclical recovery to be priced in. If the Nifty financial year 2021-22 (FY22) and FY23 index EPS forecasts sustain, in a year P/E is only likely to go back to pre-pandemic levels. Market upside thus may only come from upgrades to FY23 EPS (currently +21 per cent YoY), and better medium-term growth prospects,” wrote Neelkanth Mishra, managing director, co-head of Asia Pacific Strategy and India equity strategist at Credit Suisse in a December 8 note.

From their March 2020 low, the S&P BSE Sensex and the Nifty50 have gained 79 per cent. The gain in mid-and small-caps has been even sharper with both the respective indices moving up 83 per cent and 102 per cent, respectively during this period. A large part of this rally has been on account of the gush of liquidity from foreign institutional investors, who have put in Rs 134,463 crore thus far in CY20.

Corporate earnings, especially in the July – September 2020 quarter (Q2FY21), got a boost from lower raw material cost and cost cutting measures adopted by companies in the backdrop of Covid-19 pandemic.

But can the recovery in corporate earnings last or will the earning downgrades resume as the raw material cost, especially metal prices rise?

According to Mishra of Credit Suisse, in the last seven years, index earnings per share (EPS) estimates have fallen by 10 – 35 per cent from their first print. The sectoral breakdown of these downgrades shows that consumer discretionary and banks accounted for most of the downgrades.

“With banks now comfortable with their corporate non-performing assets (NPAs), and the growth outlook improving, we believe risks of substantial cuts to FY23 earnings are low,” Mishra wrote.

Those at Jefferies, on the other hand, say after a weak June 2020 quarter, corporate earnings were already higher by 16 per cent YoY in the September 2020 quarter. As the base gets weaker/recovery gets stronger, the numbers, they believe, will only improve going ahead.

“The current Nifty earnings estimates build in flattish earnings in FY21, followed by over 30 per cent in FY22. Interestingly, despite the seemingly high earnings estimates, consensus actually upgraded FY21/22 numbers by around 3 per cent since they bottomed in September 2020. Meanwhile, improving performance of banks on the NPL front should be a positive for earnings,” wrote Mahesh Nandurkar, managing director at Jefferies in a December 8 co-authored report with Abhinav Sinha.

That said, Nandurkar believes though markets look expensive on PE basis (around 21x one-year forward), but adjusting for the low yields, the earnings and yield-gap gauge is trading only marginally above its long-term average. The research and brokerage house remains overweight on financials, property, discretionary, industrials and materials. Maintains a neutral stance on Pharma, telecom and energy; and underweight on staples, utilities, IT services.

Credit Suisse, on the other hand, remains underweight on discretionary (prefer four-wheelers over two-wheelers) NBFCs, healthcare and cement. “Banks, especially private banks, remain the best vehicle to gain exposure to the general economic uplift that we anticipate. Other overweight sectors are industrials and metals,” Mishra said.