Reuters Market Eye - Nomura expects the Sensex to touch 21,700 by the end of 2013. The investment bank says positives include potential rate cuts, easier domestic liquidity and reform momentum.
However, Nomura warns risks include "a broken" capex cycle, weak government finances, and a poor external account.
Nomura sees downside risks to consensus forecast of 13 percent earnings growth for fiscal 2014, adding it expects at most a 10 percent growth.
The Sensex is trading at 13.8 times, or a 10 percent discount to its three-year average, Nomura adds, noting that "is about right given the market's adverse macroeconomic ecosystem and high systemic imbalances - slow growth, high twin deficits and a weak rupee".
Nomura picks ICICI Bank, ITC Ltd (ITC.NS) , Mahindra & Mahindra Ltd (MAHM.NS), Dr Reddy's Laboratories Ltd (REDY.NS), and Zee Entertainment Enterprises Ltd (ZEE.NS) as its top picks for the year.
By sector, Nomura is "overweight" on banks, consumer, media, property, pharma, IT services, oil and gas, and utilities. * Nomura is "underweight" on autos, infrastructure and construction, capital goods, metals and mining, and telecoms.
(Reporting by Manoj Dharra)
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