Investor pessimism overdone, feels Deutsche

Domestic investor outflow might recede, says Citi; hopeful speculation from both on various issues

Deutsche Bank believes the recent investor pessimism in India is overdone and sticks to its target of 22,500 for the Bombay Stock Exchange’s benchmark Sensex by the end of December.

It says the government might shift to executive decisions to pass its agenda, focusing on actions not requiring parliamentary approval, thus reducing concerns about its reform agenda after a key ally withdrew from the ruling coalition.

The bank also expects government spending to return in the new financial year starting in April, easing liquidity shortages.

The Sensex closed 54.18 points or 0.3 per cent lower today, at 18,681.42. Citi, in its latest report, said it was positive that the Sensex would touch 20,800 by December 2013, as a likely decline in the pace of domestic investor outflows could lend support to the market. It says the acceleration in domestic investor outflows was partly because of unwinding of mutual fund units bought in 2007-08, with net asset values reaching breakeven levels, and selling by insurance firms as the unwinding for three-year lock-in products ends in October.

“Outflows won’t end now but they should ease soon,” says Citi. “If flows are to reverse, it’s the HNIs (wealthy individuals) that will lead, with portfolios skewed to debt, alternative returns moderating (rates down, gold sluggish, real estate) and a lot are clued into equity. Expect them to come either directly or via MFs but the market has got to move first.”

Citi says the market (Sensex) has to rise 15-25 per cent (up to 22,000-24,000) first, before domestic investors return.

Deutsche says the infrastructure sector could also see a pick-up in activity, after the approval process for environmental and forest clearances was de-linked, while noting stalled projects would be a focus for the government.

Deutsche adds the government could announce next month an increase in domestic gas pricing, acceleration of new investments in oil and gas exploration and also measures friendly to exporters. “With the current account deficit becoming the key macro risk, we expect the government to announce several export-friendly measures in the next Export Policy (due the first week of April),” it says.

Benchmark indices are down seven per cent from their 52-week highs in December and valuations are at 13.3 times , a 14 per cent discount to its five-year trading average. Their premium to MSCI Asia ex-Japan also remains below the long-term average, says Deutsche.

The bank says its top picks remain Axis Bank, Bank of Baroda, Larsen & Toubro, Maruti Suzuki, Punjab National Bank, Reliance Industries, Tata Consultancy Services  and UltraTech Cement.