Monday, 26 September 2011

Rate-sensitives may Soon be Back in Favour -The Economic Times -Sep 23 2011

Many feel the RBI is done with rate hikes.That could mean good news for auto,banks and infra stocks

Avolatile market is always game for new ideas.It doesn't really matter whether the idea is just conventional wisdom passed off as a great breakthrough.One such idea doing the rounds these days is about interest ratesensitive stocks.The argument is very simple and compelling.Since these stocks,as their description suggests,are extremely sensitive to interest rate movements,most of them have been plumbing new depths ever since the Reserve Bank of India (RBI) started its monetary tightening measures to rein in high inflation.Just take a look: the Bankex is down 20.83%,the CNX Infrastructure index is down by 27.4%,while the BSE Auto Index is down by 9%.The BSE Sensex,the market bellwether,is down by 17.96% in comparison.Now,we come to the crux of the argument.Having hiked rates 12 times since March 2010,many economists believe the banking regulator may finally pause or at best hike the policy rate just once by 25 basis points.They argue if the interest rates continue to rise further,growth may be affected something the RBI won't risk despite its hawkish stand in the last policy statement.If you buy that theory,it's time to rush to the counters of banking,auto and infrastructure stocks.Don't worry.The advocates of the theory assert it is a win-win strategy since these stocks may bounce back on any good news (even tiny ones would do) as they are sharply down compared to their peers in the other sectors.


The Bankex,the index comprising banking stocks,has slipped from 13,778 to 10,908,down 20.83% in one year,primarily on fears of decreasing margins and increasing non-performing assets (NPAs).According to rating agency CRISIL,the significant increase in the interest rates over the past 18 months will adversely impact the asset quality and profitability of Indias banks.The banks gross non-performing assets (NPAs) ratio is expected to increase to 3% by March 31,2012,from 2.3% a year ago.However,the report also mentions that so far banks have been passing on the increasing funding cost to borrowers,enabling them to maintain their net interest margin (NIM) at around 3%.The RBI's mid-quarter monetary policy review of September 2011,says year-on-year,non-food credit growth at 20.1% in August was above the indicative projection of 18%,thereby removing fears of a slowdown in credit growth.As per a September 5 report by Citigroup Capital Markets,fundamentally,banks now appear better placed to absorb the impact of any asset quality deterioration than they were historically.Banking is a high-beta sector and it is more global events at play in the short term.However,the long-term fundamentals are intact, says K Ramanathan,chief investment officer,ING Mutual Fund.He feels valuations are attractive and advises investors to invest with a two-year perspective.Madhumita Ghosh,head - PMS,Unicon Financial Intermediaries,advises investors to increase their exposure to banking stocks,since the negatives are priced in the current valuations,which she feels are low.Investors should have 15-20 % of their equity portfolio in banking stocks,given the expected growth of 7-8 %, says Madhumita Ghosh.


This sector has been one of the worst performers during the past year.The CNX Infrastructure index has fallen 27.4% during the period.According to Value Research,an independent mutual fund tracking firm,the infrastructure funds were down 23.24% in the past year.Several individual stocks in the construction and real estate space have fared even worse most were down almost 60-70 % during the past year.There has been very little policy initiative for a year,with the government entangled in a host of controversies like the 2G scam,Common Wealth Games scam and so on.Investments have substantially slowed down in infrastructure projects as rising interest rates have increased funding costs and put margins under pressure.However,there are signs of action now.As per a report by IDFC Securities,NHAI has already rolled out orders for about 3,100 km of roads in this financial year.Earlier this month,the Cabinet cleared a proposal to infuse.18,500 crore in the Delhi Mumbai Industrial Corridor Development Corporation (DMICDC).This will help build industrial enclaves along the Delhi-Mumbai rail corridor,encompassing seven states Delhi,Uttar Pradesh,Haryana,Rajasthan,Gujarat,Maharashtra and Madhya Pradesh.However,investors must realise that infrastructure is a long-term story and they should not expect miracles overnight.Buy companies with strong balance sheets and that can manage their working capital cycles efficiently, advises Sadanand Shetty,fund manager,Taurus Mutual Fund.


This is one interest-rate sensitive sector that has fared a little better in comparison.In fact,it is the only rate-sensitive index that has managed to outperform the BSE Sensex during the past year.The BSE Auto index fell from 9,419 to 8,556,a loss of 9% compared with the 17.96% fall of the Sensex.A report by ICICI Securities expects a moderation in volume growth at 13% for the financial year 2011-2012.As compared with this,the auto industry grew at 25% in 2010-11.Analysts expect a mixed bag from autos this year.Passenger car and commercial vehicle segments are affected due to the fuel and interest rate hikes,while two-wheelers are unaffected, says Vishal Srivastava,auto analyst,CARE Ratings.Two-wheeler stocks like Hero Honda,Bajaj Auto and Mahindra and Mahindra had seen their stock prices move up during the past year and outperform the Sensex.Maruti,however,has been affected due to the labour disruptions at its factory.Investors will have to evaluate stocks in the sector on a case-bycase basis, says Avinash Gorakshkar,head of research,Edelweiss Capital Advisors.


However,dont be smug about the prospects of these sectors.You should be aware that second guessing the RBI is not an easy task.A case in point is the hawkish tone of the regulator in the last policy statement.Many analysts were surprised by the tone,and they arent sure anymore if the central bank is done with its policy tightening.That is the huge risk you are taking when you buy rate-sensitive stocks.They react violently to any adverse interest movements.So if the central bank surprises the market with further hikes,it could turn out to be a really nasty surprise for you.

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