Corporate earnings recovery will likely provide a cushion for valuations in 2021, Motilal Oswal Private Wealth Management said in its 2020 year-ender note.

It pointed out that earnings growth over the last few years have remained subdued on account of structural reforms such as GST, IBC and RERA.

“With Corporate India deleveraging its balance sheet by a considerable extent over the last few years, and with financial system (particularly PSU banks) already at high provision coverage, corporate profit-to-GDP ratio in India should start inching upwards steadily from its current decadal lows over the next few quarters,” the note said.

“Hence, while our ‘Temperature Gauge Index’ for equities indicates that Large Cap valuations are in expensive zone, earnings recovery going forward will likely provide cushion for valuations. The broader market still offers a lot of attractive investment opportunities.”

According to the note, Q2FY20 domestic earnings season saw a ‘bumper harvest’ with majority of companies beating estimates.

“Cost optimisation during the lockdown phase has been one of the main reasons for the growth in profits apart from demand recovery,” the note said.

“Managements across sectors are talking about continued recovery in the upcoming quarter due to the festive season and pent up demand. BFSI sector has delivered strong earnings with large private banks indicating lower than expected stress on their loan books. Healthcare sector has also delivered double digit returns in this quarter. After many years, analysts are finally considering a positive upgrade in Nifty50 earnings.”

Besides, the note expects an extended period of low yields on the back of RBI’s maintenance of its accommodative stance while emphasising the importance of economic growth over inflation.

“Relaxation of the prevailing inflation targeting mechanism is also being discussed with the Govt… It would be prudent to follow a barbell portfolio approach.”

“Gold should continue to remain part of portfolio allocation, predominantly as a hedge against heightened volatility.”

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