Deutsche Bank cuts Sensex target to 21,000 by December

Deutsche Bank on Monday cut its Sensex target to 21,000 by December 2013 from the earlier 22,500 level on rising global risk aversion, and said currency stability holds the key to market direction.

"We are cutting Sensex Dec-13 target to 21,000, which implies a PE of 15.5x on FY14e EPS and an upside of 8 percent from current level.

"Following the 5 per cent depreciation of the Indian rupee in June and given continuing fears of abating global liquidity, currency stability has emerged as the overriding catalyst for the Indian equity market and until the currency stabilises, we expect the Indian equity market to stay highly volatile," the bank said in its India Equity Strategy report.

In May, Deutsche Bank has set 22,500 points target for Sensex by December 2013.

The report said the simultaneous interplay of a faster than anticipated Quantitative Easing (QE)-tapering, India's high short-term external financing needs and fears over China slowdown will set the tone for Indian equity markets over 2H2013, with the currency emerging as a key determinant.

"Our expectations of a reversal in the insurmountable trinity of sticky inflation, elevated interest rates and adverse current account deficit have been delayed by the generic risk off sentiment enveloping emerging markets.

"Despite India standing out on a relative basis on momentum in several economic criteria to its emerging market peers, its large current account deficit coupled with high short term external debt obligations will amplify its risks in the current environment of abating global liquidity, which should result in investors seeking a higher equity risk premium," it said.

The bank said it has modified its model portfolio by raising overweight stance towards sectors benefiting from currency depreciation and lowering weight on rate sensitives.

"We maintain overweight on energy on the back of positive policy traction. Following re-emergence of concerns over China's growth slowdown, we have moved metals to an underweight," it said.

"With both - the current account deficit and its financing - emerging as core risk areas, any sharp decline in international oil prices will be a big sentiment booster for the currency and as a corollary, the Indian equity market.

While a sharp decline is not our base case scenario, we do believe that once the geopolitical concerns in the middle-east subside, the stubborn resilience in oil prices may not sustain."

With oil and gold consisting 46 per cent of India's merchandise imports, any sustained weakness in oil prices below the psychological level of USD 100/bbl, combined with the recent sharp decline in gold prices will assuage concerns over the current account deficit and emerge as a core market catalyst and may lead us to review its current stance, it said.

In addition, the proposed liberalisation in FDI caps coupled with urgency over removing procedural bottlenecks and incentivising domestic gas production should also assuage sentiment over government's focus on addressing structural macro woes, it said.