Indian markets very expensive, may continue to rise in 2021: Credit Suisse2 min read . Updated: 17 Dec 2020, 06:20 PM IST
- The broking house, which expects upgrades to India’s medium-term growth forecasts in 2021, has also increased the weightage of the consumer discretionary sector in their model portfolio
NEW DELHI: Indian benchmark stock indices are expected to witness high single-digit to low double-digit growth in calendar 2021, despite pricey valuations, Neelkanth Mishra, managing director, co-head of Asia Pacific Strategy and India equity strategist at Credit Suisse said on Thursday. According to the brokerage house, Indian equities are no longer cheap, and are only a short distance away from being the most expensive they have ever been.
NSE benchmark Nifty is up around 13% on a year-to-date basis till 17 November, despite economic weakness. The 12-month forward price-to-earnings (P/E) multiples are at present around 20% higher than those on 31 January.
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Credit Suisse believes that earnings will be the main driver of the market up, which will be dependent on the upgrades to the financial year 2023 EPS (earnings per share). “Despite the fact that markets are very expensive, we do not expect a sharp fall. We think that earnings upgrades are likely for FY22 and FY23. Therefore, a high single-digit to low double-digit growth can be expected in the market in 2021," said Mishra.
According to Credit Suisse, if Nifty and current FY22 and FY23 index EPS forecasts sustain, in a year, P/E ratios are only likely to go back to pre-pandemic levels. “Any reasonable strategy must factor in lower or at best unchanged P/E going forward," Credit Suisse said in a note.
However, upward revision to earnings estimates will be a challenge, as EPS estimates are usually downward revised in India. According to the brokerage, in the last seven years, Nifty EPS estimates have fallen by 10-35% from their first print.
“That said, 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 NPAs, and the growth outlook improving, we believe risks of substantial cuts to FY23 earnings are low," said Credit Suisse.
“EPS upgrades will continue and we believe that the FY22 GDP numbers will be upgraded too, and when that happens, we expect that earnings estimates will be updated in several sectors," said Mishra.
The broking house, which expects upgrades to India’s medium-term growth forecasts in 2021, has also increased the weightage of the consumer discretionary sector in their model portfolio.
With less than 2% of the economy now restricted due to the pandemic, the “opening up" trade may be over, but the restocking is not over yet. Further, India’s pro-cyclical fiscal policy took away from growth in the second quarter, and as tax revenues pick up, can turn into a growth tailwind" said Credit Suisse.
The brokerage house believes that the positive growth surprises can continue for another four-six months.