India’s ‘BEER’, not alcohol, may lift coronavirus fear among stock investors

NEW DELHI: Social media buzz that consuming alcohol, or beer products, can help prevent the deadly coronavirus has turned out to be just rumours. The deadly virus has already infected over 1,15,000 people worldwide.

But the term ‘BEER’ can offer some comfort to Indian stock investors. BEER ratio, a metric used to evaluate the relationship between bond yields and earnings yields, has fallen below 1, suggesting that the stock market has become undervalued.

In the past, whenever the ratio has fallen to such levels, it has been followed by a 20-25 per cent surge in Nifty.


On Wednesday, the 10-year bond yield stood at 6.13 per cent, while the one-year forward Nifty50 PE stood at 15.4 – off its recent peak of 18.4 – resulting in an earning yield value of 6.5 (1/forward PE or EPS/price). And that gives a BEER ratio of 0.94.

This has been the first time since the November 2016 cash ban that earnings yield has outpaced bond yields.

“Currently ‘earnings yield’ of Nifty exceeds bond yield by 45 bps. Such instances have provided high expected returns in the past. Examples include demonetisation (44 bps) and ‘Taper Tantrum’ (44 bps),” ICICI Securities said in a note on March 9.

While the previous Black Swan events caught the central banks unaware, analysts noted that policymakers are carefully monitoring the epidemic and are taking pre-emptive measures to make sure the global economy does not fall into recession.

Back home, a sharp drop in crude oil prices is also expected to support the economy.

JM Financial believes even if one discounts the fact that earnings could be irrelevant and upside risks to fiscal health have risen due to the virus spread, stock valuations do not look stretched, given the extremely low risks to inflation.

While this brokerage maintains its “low growth” outlook, it says India is beginning to throw up opportunities in stocks where cash flow visibility is high, but valuations are building in a bear case.

Data showed Nifty’s PE has come closer to the bottom of past three falls at over 10 per cent. Nearly 30 of the 50 index stocks have forward earnings yields of more than 6 per cent.

“The top seven momentum indicators, which have an accuracy of 67-100 per cent in predicting previous bottoms, are yet to signal a final low. Possibly, a large part of the price fall may have played out,” CLSA said.


The brokerage said the earnings yield nearly equates the 10-year bond yield and this is a good indicator of a Nifty bottom.

“If our premise of this not being a deeper correction is true, buying should emerge around the last Nifty bottom of 10,600 (i.e. 10,600-11,100). Obviously, this premise assumes Covid-19 does not have a much longer and a deeper impact on the economy,” CLSA said.

ICICI Securities has assigned very low probability of a global recession and views the current environment as an opportunity to buy equities. Among specific stocks, the brokerage prefers Bharti Airtel, NTPC, Titan, Jubilant Foodworks, HUL, UltraTech Cement, Cipla, SBI Life, among others.