| India as well as global markets including the US have seen a series of rate hikes in last few years. The European Central Bank has been raising its key interest rate steadily and is expected to increase it further to 4.25 per cent in September. | |||||||||||||||||||||||||||||||||
| The Bank of England recently hiked its benchmark rate to a six year high of 5.75 per cent from 4.5 per cent in last August, and there is a fairly high probability of a further hike to 6 per cent. Even the Bank of Japan is expected to raise its rate gradually from the prevailing 0.5 per cent considering its economic growth and prospects of inflation. | |||||||||||||||||||||||||||||||||
| On the other hand, after two years of steady increases, the Fed left interest rates unchanged at 5.25 per cent for more than a year - the longest period of pause in 20 years. The general expectation is that going ahead the Fed is likely to maintain rates at the current level given the housing slump and overall slowdown. | |||||||||||||||||||||||||||||||||
| In India, too, commercial banks hiked both deposit and lending rates by an average of 200 basis points in the last one year alone in response to the Reserve Bank of India's (RBI) tight money policy. RBI hiked repo rates and cash reserve ratio by 75 and 150 basis points since October 2006 to 7.75 per cent and 6.5 per cent respectively. | |||||||||||||||||||||||||||||||||
However, it kept key rates unchanged in its last annual monetary policy meeting in April citing that it wished to first see the effect of its previous rate hikes. What will RBI do in its forthcoming review meet on July 31? Will it hike interest rates further? Or pause?
| |||||||||||||||||||||||||||||||||
| Hard or soft? Going by the macro situation, RBI could pause again. Inflation has come close to the government's target of 4 per cent. Deposits have grown in tandem with advances for the first time since last three years. | |||||||||||||||||||||||||||||||||
| Call rates have touched abysmally low levels of less than 0.5 per cent owing to abundant liquidity in the system (at least Rs 50,000-60,000 crore). And the 10-year G-Sec yield has slipped below 8 per cent. All these support the argument that rates should not harden further. | |||||||||||||||||||||||||||||||||
| Says Sitaram, general manager, IDBI, "We should see some softening as banks are in a better fund position unlike the extreme tight liquidity condition in the end of March and April." | |||||||||||||||||||||||||||||||||
| Agrees Rajen Shah, chief investment officer, Angel Broking, "Interest rates seem to have peaked and in the next six months they may go down." | |||||||||||||||||||||||||||||||||
| However, rising crude oil prices, an appreciating rupee, the possibility of rates hardening globally and the robust growth of over 20 per cent in money supply remain key risks. | |||||||||||||||||||||||||||||||||
| Says Sejal Doshi, chief executive officer, Finquest securities, "The picture will be clear once the busy season starts i.e. after the September quarter as the June quarter is generally a lean quarter." | |||||||||||||||||||||||||||||||||
| At the worst, bankers expect another 25 basis points hike. At this juncture, as the overall expectation on rates is "stable", how do you play interest rate sensitive stocks? | |||||||||||||||||||||||||||||||||
| Sensitive stocks Market participants are bullish on the banking sector as a whole and select real estate stocks. But the outlook for auto stocks continues to be one of caution. | |||||||||||||||||||||||||||||||||
| BANKING | |||||||||||||||||||||||||||||||||
| Despite a challenging environment and turbulent June quarter, the BSE Bankex has gained 18 per cent since the beginning of the year compared to the Sensex gain of 11 per cent. Investors have flocked to buy bank stocks in the belief that the banking industry is finally able to pass on the costs (sustaining credit growth even with higher lending rates). | |||||||||||||||||||||||||||||||||
| Big-bang capital raising plans of behemoths like ICICI Bank and HDFC Bank, though made investors nervous initially, have boosted confidence on the sector's growth. As always, given the high market levels currently, it is safer to be stock specific. | |||||||||||||||||||||||||||||||||
| Domestic brokerage firms are recommending banking stocks like ICICI Bank and HDFC Bank on expectations of strong performance going forward. Shah of Angel Broking suggests some mid-cap and small banks like South Indian Bank and IndusInd Bank. A leading domestic broking firm is positive on the housing sector and feels that LIC Housing Finance holds room for appreciation. | |||||||||||||||||||||||||||||||||
| Top Picks: ICICI Bank: Largest private sector bank, market leader in retail, credit growth to better industry HDFC Bank: Better quality of earnings, strong fee-income growth and good asset quality South Indian Bank: Strong base in Kerala and NRI clients, high proportion of low cost funds, strong thrust on debt recovery LIC Housing: Strong loan growth, expanding spreads, improving asset quality | |||||||||||||||||||||||||||||||||
| AUTOMOBILES | |||||||||||||||||||||||||||||||||
| Auto stocks have been severely battered with the BSE Auto index down 10 per cent since January 2007, thanks to 400 basis points hike in interest on auto loans in last one year. | |||||||||||||||||||||||||||||||||
| Though this does not affect the EMI of an individual much, according to NR Narayanan, head-vehicle loans, ICICI bank, it has affected sentiments. Analysts are skeptical about the auto sector as growth is slowing down and pricing power is deteriorating because of competition. | |||||||||||||||||||||||||||||||||
| Says an analyst, "It is better to stay away from commercial vehicles and two-wheeler stocks as the dull environment is not only because of rising interest rates but also due to other factors like higher freight rates (in case of CVs) and lower demand (in the two-wheeler market). Although the sector is still in the negative list of most market participants, Mahindra and Mahindra (M&M) and Maruti Udyog (MUL) are exceptions. Several analysts have a buy on these two stocks. | |||||||||||||||||||||||||||||||||
| Top picks: M&M: Diversified product portfolio and value in subsidiaries MUL: Market leadership, strong performance driven by new launches | |||||||||||||||||||||||||||||||||
| REAL ESTATE | |||||||||||||||||||||||||||||||||
| Real estate prices corrected by 10-15 per cent in most markets in the last 3-4 months as people refrained from buying houses as prices nearly doubled over the past three years. Real estate stocks, on the other hand, have seen a sharp run-up in their stock prices over the past quarter or so, with stocks like Akruti Nirman, | |||||||||||||||||||||||||||||||||
| Unitech and Peninsula Land shooting up in the range of 35-45 per cent. How is this possible? The explanation lies in the fact that even after a correction in prices, real estate players were making profits because their cost of land remained way below the market price. Further, the sector got re-rated on account of DLF's Rs 9000 crore IPO. | |||||||||||||||||||||||||||||||||
| Going forward, softer interest rates and a further correction in realty prices could bring investors back to the market, says, Gulam Zia, national director, research and advisory services, Knight Frank. This might however take about a year, he cautions. | |||||||||||||||||||||||||||||||||
| After the recent run-up in prices, real estate stocks look fairly priced with little room for appreciation say analysts, who are positive but not bullish at this point. Some brokerages recommend DLF and Sobha Developers because of their size and clout. | |||||||||||||||||||||||||||||||||
| Some other companies like Zandu, Atlas Cycle, VST Tiller, RPG Cables and Cable Corporation who are sitting on huge tracts of land holdings might see unlocking of value in future. | |||||||||||||||||||||||||||||||||
| Top picks: DLF: Size is an advantage, diversified land reserves Sobha Developers: Impressive margins and steady cash flows | |||||||||||||||||||||||||||||||||
Top Section
Explore Business Standard