Deutsche Bank ups year-end FTSE 100 target, sees 250 underperforming

The UK’s mid-cap FTSE 250 index could see 10% downside relative to the FTSE 100 by year-end, Deutsche Bank said in its latest equity strategy note.

The bank pointed out the 250 has risen to within 1% of its pre-referendum level and outperformed the 100 by 7% since early July, thanks to the improvement in global risk appetite, the stabilisation in sterling and hope that the near-term negative UK growth impact from the referendum might be limited.

However, with the pound expected to fall further and economic lead indicators pointing to a sharp downturn in UK growth, the mid-cap index is likely to suffer.

Deutsche Bank lifted its year-end target for the FTSE 100 to 6,800 from 6,150 – around 1% higher than its current level – saying it continues to like the index’s defensive profile and sensitivity to sterling weakness.

“Our 8% earnings per share growth projection for the FTSE 100 is considerably above consensus (which still expects negative EPS growth), but there are signs that consensus is beginning to turn upwards, with net earnings revisions now at a 5-year high.”

The bank said it remains cautious on European equities. “European equities have not yet caught up with the compression in fixed-income risk premia (peripheral and corporate bond spreads) over the past weeks, which points to around 5% near-term upside for European equities. However, we remain cautious on the market outlook over the coming months.”

Among the reasons for its caution, DB cited downside risk for global growth and said the recent surge in macroeconomic surprises, which has supported risk appetite, is unlikely to continue.

In addition, it argued that hawkish Fed re-pricing over the coming months is set to tighten financial conditions via a stronger dollar and higher real bond yields.

Deutsche maintained its 325 year-end target on the Stoxx 600, which leaves around 4% downside to current levels.