2020 has been an exciting year for the markets with many ups and downs; from extreme pessimism to extreme euphoria. With the markets reaching an all-time high on a daily basis investors are at a crossroad; where the market is expensive but the expectations are very high. The estimates say that almost 30% CAGR in earnings over FY21-23 is driven by top-line growth as well as margin expansion. Real estate, Life Insurance and lenders are sectors that are expected to outperform in 2021 as per Motilal Oswal Asset Management Company.
If the Indian economy is to recover, the lifeblood of the system has to start kicking in again. For the last few years, we have seen anaemic credit growth as well as a lot of banks writing of their NPLs. Now with corporate NPLs behind us and the COVID impact being lesser than expected, we may see this space showing one of the fastest profit growth rates in multiple years, with corporate banks being the key contributors
b) Life insurance:
This is a structural play for a very long period of time, given the under penetration and new segments developing. Demand for insurance has increased given COVID, 2021 may see much faster growth with economy opening up and a much better base.
c) Real estate:
This is one sector which has been under stress for a better part of the last decade. We have seen massive consolidation in the residential real estate markets. With a) Low-interest rates b) high liquidity c) Flat property prices for almost 6 years d) Better regulations and e) Better quality corporates, this sector seems primed for a revival.
Themes which may play out:
Every downturn gives birth to some new themes, a couple of themes evolving out of Covid are:
a) Digitization of the economy: This can be the predominant theme be it for sales, communication or payments. We may see some new business models evolving as well as some of the old players in this space benefitting significantly from this.
b) Capital expenditure: Both private CAPEX, as well as household CAPEX, were missing for the last 5 years, we can see a revival driven by lower interest rates and pent up demand. Also, the government will have to focus on job creation which may lead to higher CAPEX.
This suggests that markets are not only expecting a rebound to the base but a cyclical upturn. If this were to fructify then further upside can be seen in the market helped by high liquidity and lower rates. COVID has made corporates go for zero-based cost management which can lead to sustained cost savings and if growth were to revive a big revival in profits. Hence next couple of years may see a) growth b) operating leverage and c) financial leverage playing at the same time.