After downgrading domestic markets to ‘neutral’ rating last week, global brokerage Deutsche Bank today reiterated its Sensex target of 28,000 for December, implying an upside of about 14 per cent from current levels.
Deutsche Bank had last week downgraded Indian equities to ’neutral’ from ‘neutral/overweight’ relative to other global emerging markets, saying valuations appear “very stretched” against lower GDP growth.
“We reiterate the Sensex target of 28,000 for December, implying upside of 14 per cent. We believe that a single party government, and Prime Minister Modi committed to economic development and an aspirational India yearning for change should allay investor scepticism. Economic development has now emerged as the centre focus of any government’s political strategy,” Deutsche Bank said in its report today.
After crossing the 25,000-mark in early trade, the Sensex retreated to end with a marginal rise of 23.53 points at a fresh record close of 24,716.88 today on massive profit booking ahead of the swearing-in of Narendra Modi as Prime Minister.
“The Sensex is currently trading at 12 month forward PE of 15.8 times, which in our view is not too expensive for a market at the cusp of change and particularly given that in past five years,” it said.
The Sensex traded at an average of 15.7 times. Even relative to emerging markets, India does not appear expensive versus its history with MSCI EM, the report added.
Since August 2012, the economy has stabilised, after witnessing a vicious downcycle between 2010 and 2012.
While the growth has bottomed and currency has stabilised, a manufacturing turnaround still remains elusive and inflation remains above RBI’s comfort level.
The brokerage firm also expects an integrated energy policy to raise the country’s energy security through higher domestic production and dilution of government ownership in state-run banks.
With most foreign institutional investors until the election verdict having been heavily positioned in the defensive, the sector rotation into cyclicals looks set to continue. It is also likely that with local selling ebbing in domestic cyclicals, we may see amplified exuberance at least until the budget, the report said.