The Year 2020 view by JM Financial

The Year 2020 view by JM Financial 2019-12-06

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Market indices at all-time highs. Economy at its slowest pace. Enough has been debated about global flows and why the composition and earnings drivers of the main indices do not fully reflect the current slowdown. While the probability of a tail risk to economy and to the markets from a collapse of the financial system is lower owing to global and domestic backstops, macro remains mixed and a study of the earnings profile of companies under coverage is showing us that a recovery is necessary for stock price levels to give sustainable returns from here on, more so for the midcaps. We are building a recovery thesis, albeit more of a "worst is behind thesis" rather than a fully blown recovery, led by lower interest rates, fiscal measures aimed at demand side, and narrowing of corporate spreads.

A broad based recovery will continue to be stalled by i) limited fiscal space, ii) overcapacity in housing, power and iii) muted private sector capex. Based on this, the bottom-up earnings estimates yield us 11%/29%YoY growth for sales and PAT for Nifty in FY21E. For our broader coverage of 200+ stocks, similarly, we estimate 11%/26%YoY. The earnings growth leaders are the consumer discretionary, financials and materials and laggards IT, and industrials. Market multiples (NTM PE, earnings yield) are above neutral zone and while flows could take it higher, a macro recovery is essential to make it more sustainable. The move towards mid and small caps is a medium-term call, in our view, given that the contribution of the recovery factor is higher for them. Sector-wise, we recommend overweight private financials, select industrials for a recovery, tactical overweight in healthcare and maintain equal weight in IT.

  1. Mixed macro now and gradual recovery next year
  2. How much of the earnings growth is recovery led?
  3. Pharma and healthcare – a new tactical buy
  4. The top 5 large caps and top 10 mid/small cap picks
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