Lockdown to force Earnings Downgrades;Nifty Target at 10,100 for March 2021

26 MARCH 2020

Citi analysts expect the 21-day lockdown period to be followed by a month of gradual relaxation of restrictions. Even in a lockdown scenario, Citi analysts estimate only 45% of the activity to halt, with agri (~15% of GDP), government (10%), some export and import, financial services, electricity, water, emergency services and basic consumption activities still ongoing.

Equity valuations now appear attractive as per Citi analysts. However, near-term volatility cannot be ruled out.

A quick overview:

    Market Update

  • Nifty ended at 8,641.45 on Thursday, a recovery of ~13.5% since Monday‚Äôs close, after falling ~12.9% on Monday (23rd March).
  • The Finance Minister announced a fiscal relief package of INR 1.7 lakh crores on Thursday.
  • Citi analysts expect sharp downgrades to FY21 earnings estimates in the coming weeks. They expect Nifty FY21 earnings to remain flat YoY and recover in FY22, off a low base.
  • Citi analysts set a Nifty target of 10,100 for Mar21, implying a ~16% upside from current levels.
  • INR has lost ~4.5% against the USD so far in Mar20, remaining an outperformer among EMs, owing to lower oil prices, seasonal strength and support from the RBI.
  • The RBI took significant steps like additional rounds of LTRO, FX swaps and sovereign bond purchases to support the INR and provide liquidity.
  • Citi analysts expect the RBI to try and keep the 10yr G-sec yield below 6% through direct actions and deliver a 50bps repo rate-cut in April.

    Valuations Attractive:

  • Citi analysts believe that financials, consumer discretionary, materials, and industrials may be the earliest beneficiaries of a recovery post the crisis, given current valuations.
  • Nifty 1yr-fwd P/E valuation is close to 12x, trending >1sd below long term mean (>2sd below 5yr mean).
  • Bond yield gap is at its lowest since the Global Financial Crisis 2008, while valuation premium relative to other EMs is nearly 1sd below mean.
  • Citi analysts also revise down their GDP growth estimate for 4QFY20 to 3% YoY. Further, GDP growth in 1QFY21 is expected to slow to 0.5% YoY, averaging 2.5% YoY for FY21 (revised down 300bps).
  • While it is tough to forecast the global/domestic trajectory of Covid-19, any further delay in containment would have significant economic/earnings impact. DMF flow trends will also be crucial to watch.

    Portfolio Action

  • Subject to risk appetite, investors who are underweight equities may look at long term opportunities created by recent correction and invest in a staggered manner.
  • Fixed Income investors may continue to prefer high credit quality with short duration and remain diversified in their portfolios.

Fixed Income Investors with higher risk appetite may also look at allocating to dynamic bond funds having high credit quality portfolios.

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