High FII inflows to continue this year: Deutsche Bank

After pumping in $25 billion into Indian equities last year, foreign investors are likely to maintain the trend this year, too, says Deutsche Bank.

“Foreigners are getting excited about the government’s steps to stoke the economy,” said Abhay Laijawala, head of research at Deutsche Equities India. “As far as foreigners are concerned, they are looking at India very attractively. India’s demographic and vibrant domestic economic model gives one that attractiveness.” He said this year, too, the Indian market would continue to see “disproportionately high” investments by foreign institutional investors (FIIs), thanks to the rising global risk appetite and domestic policy action.

“Since January 1, we have seen about $2 billion of FII flows, which indicates investors continue to keep faith. India will continue to get the lion’s share of flows, compared to markets such as Korea,” Laijawala said.

Deutsche Bank expects the momentum seen in the Indian stock market since September to continue. It has set a base target of 22,500 for the Sensex for December, indicating about 16 per cent returns for the year. “At our target, the Sensex would trade at the 2013-14 price-to-earnings (PE) multiple of 15.9 times, in line with the average multiple at which the market has traded over the past five years,” said Laijawala.

However, India was yet to conclusively enter a bull market phase, he said. “For us to conclusively say we are in a bull market, we will need improvement in the macro economy and the capex cycle. Until these factors aren’t visible, one cannot say it is the beginning of the bull market,” he said.

On Thursday, the benchmark Sensex rose 0.74 per cent, or 146 points, to 19,964, after the government partially deregulated diesel prices. This move, Laijawala said, “is the single-biggest endorsement of the government’s new-found pragmatism”.

He said it was unlikely the government would announce a populist Budget next month. “The likelihood of populism taking over pragmatism is low. Restoration of growth has become not just an economic objective, but a political one as well.”

Deutsche Bank expects cyclical and rate-sensitive stocks to fare well this year. The brokerage’s top picks for 2013 include Axis Bank, Bank of Baroda, L&T and Maruti Suzuki and Reliance Industries.

Widening of the government’s current account deficit, rupee deprecation, higher crude oil prices and early elections were risks to the Sensex target, Deutsche Bank said.