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Deutsche sees record pre-Budget rally, Sensex at 33K by Dec

Deutsche Bank sees Sensex rising 23 percent by year end. The company has set a Sensex target of 33,000 by December 2015 on the back of improving macros, stable government and fall in commodity prices.

Deutsche is confident of government meeting its fiscal deficit target of 4.1 percent this fiscal. CEO Ravneet Gill believes India looks differentiated amongst other emerging markets now and is unlikely to get impacted despite outflows seen in the EMs. 

The company is expecting the market to hit a record high in pre-Budget rally.

In a discussion on CNBC-TV18, Pratik Gupta, Head – Equities, Deutsche Bank (India) said the outlook for India remains highly positive and though there is an increase in the outflows, Indian market will outperform on the back of flows by the domestic investors.

Deutsche Bank continues to see pick up in domestic flows and a 15-16 percent earnings growth this year for India. 

On rate cut, the Deutsche Bank is eyeing a 100 bps cut in 2015 with the cycle being shifted to March 2015. The company remains heavily overweight on financials. According to Deutsche, banks would be the best plays when government’s spending revives. It further mentions that domestic cyclicals will be the key beneficiary of the growth recovery.

Meanwhile, Sanjay Agarwal, Executive Chairman  (Corporate Finance) of the bank said the foreign direct investment in insurance could bring in USD 4-5 billion flows in the country.

Below is verbatim transcript of the discussion:

Q: You must have done world wind tours of FII investors, what is the sense you are getting? We have got this massive USD 1.5 billion outflow in December and the global attitude towards equities in the past two weeks has been somewhat negative. Do you think we will get good flows in 2015, something like even that USD 16 billion we got last year?

Gill: I would break that up into a couple of different points. To begin with, if you look at the emerging market world, India looks differentiated at this point in time; most of our economic metrics are looking much better, much stronger.

The fact that commodity prices have come off, crude has come off is a big positive as far as India is concerned and after three decades we have a majority government at the center with a very decisive leader and that is what investors were looking at. So, regardless of what happens and even if there was a reversal of flows from emerging markets, India would be spared or treated favourably.

Also, over the last two decades, India has been very much service-focused. That in many ways then fences off the strategic investors.

Now, with this government’s focus on manufacturing and infrastructure and this whole concept of ease of doing business you will also see the overly of the strategic investors coming in besides the financial investors, add to that the earnings growth that we expect in India of 15-16 percent, I think all of it gives India a lot of tailwind.

We think the flows that you have seen in the past could pretty much get bettered this year. So, our view on foreign flows into India, both strategic and financial is very positive.

Q: Last year your theme was return of the domestic investor and we saw that play out quite beautifully. What is your theme for 2015?

Gupta: That is definitely one of the big themes for this year and which is why from a investor perspective even if you don’t get the same increase in FII investments, you may still see the market going up because of the return of the domestic equity investor.

India had USD 16 billion of FII investments last year which was lower than the FII investment in the previous year. So, despite the big BJP victory, despite a very pro-business government we actually had lower FII investment last year and yet the market went up.

One of the reasons was very strong flows into the domestic equity mutual funds which is a trend that will pick up even further pace in 2015 especially as the outlook for some of the other asset classes like property, gold or even FMPs doesn’t look as attractive as equities.

Also, why will domestic investors come back apart from better alternatives versus other asset classes, the outlook for India is very positive as we have mentioned in your strategy report, we have a Sensex target of 33,000.

This is about 20 percent upside from the current levels and is driven by factors such as growth which will be much better this year, the economy is on a mend.

There is an expectation that there will be an RBI rate cute, Deutsche Bank’s house view is for a 100 basis points worth of rate cut this year which would make India one of the few emerging markets globally where you will see a rate cut.

You also have potential for a sovereign rating upgrade as well sometime in the next 12-18 months. Put that in context, India starts to look very attractive once again amongst all the major emerging markets this year. So, that is another reason why we think both FII as well as domestic flows into equities will remain very strong this year.

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