Market Strategy 2021 - ICICI Direct

CY20 was a remarkable year for the global economy as well as the equity markets. From the extreme end of despair and uncertainty, the year is ending on a note of recovery and hope as the fight with the pandemic nears an end with the beginning of vaccination. Indian equities were no different from global equity markets as they staged a heroic recovery of ~84% from the lows (~15% return for CY20) after the disastrous fall of ~39% in February-March, 2020.

As we embark towards 2021, the resilient domestic setup points towards a recovery in key macroeconomic data viz. GDP, Infrastructure spending post a weak year. Corporate earnings post the dip is likely to stage a handsome growth trajectory. However, after a "V-shaped" recovery and a flush of liquidity in the capital markets in CY20, the economic recovery path ahead is likely to be uneven. Furthermore, rising commodity price led inflation and new strain led risk of restrictions and lockdowns, also persist. CY21, therefore, presents an opportunity where the basic tenet of asset allocation and sectoral/security selection will be tested and identification of micro themes across segments will hold the key.

Some micro themes for CY21 are:

- PLI scheme boost for textile/electronics/specialty steel and benefits of import substitution

- Food processing to utilise excess farm output for value addition

- CRAMS - Significant capex hints at growing visible opportunities

- Cloud based opportunities in the IT sector

- Expected cyclical upswing of CV segment

- Insurance on the cusp of sustained structural growth

- Product based capital goods companies to benefit from capex upcycle

- Roads and Highways - Resilient segment within infrastructure

Nifty fair value pegged at 14400

With the worst of asset quality concerns behind us amid resolution of big ticket stressed assets and economic optimism in the post-Covid era, Nifty earnings CAGR is impressively placed at 22.7% in FY21E-23E. We value the Nifty at 14,400 i.e. 20x P/E on FY23E EPS of Rs. 720 with corresponding Sensex target at 50,000.

For CY21, we expect midcaps and small caps to gain relatively more than the large caps. Our thesis is based on the fact that delta in earnings growth during a recovery phase will be high in midcaps and small caps vis-à-vis large caps whereas multiple expansion in the former will provide additional alpha for capital appreciation. Other macro factors like benign interest rates and structural cost rationalisation measures will also aid operating and financial leverage for this category. Hence, our top picks for CY21 are in the midcap and small cap space.

For details, click on the link below: https://www.icicidirect.com/mailimages/IDirect_MarketStrategy_2021.pdf

Source : Equity Bulls

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