From auto to banks to IT: Analysts pick top sectors after US Fed rate cut

Analysts say banks, auto, real estate, IT, pharma, and metal sectors look attractive after the US Federal Reserve's rate cut

After the US Federal Reserve's supersized rate cut by half a percentage or 50 basis points (bps) late on Wednesday, analysts suggest investors stock up rate sensitives like banks, auto, and real estate.

"Our portfolio strategy would remain being invested in good quality companies with a mix of rate sensitive cyclical and long-term growth compounding stocks," said Rakesh Parekh, managing director and co-head, Portfolio Management Services, JM Financial.

On Friday, the Nifty Bank touched a fresh high of 53,711, while the Financial Services index climbed to an all-time high of 24,737. The rally in the Nifty Bank was led by private banks, whose individual sector on the NSE touched a fresh all-time high of 27,001.5.

Indices tracking the consumption space -- the Nifty FMCG, and the Nifty Consumer Durables -- also scaled fresh summits, at 65,893 and 43,651, as investors expect rate cuts to spur demand.

Meanwhile, in the past one year, the Nifty Bank has climbed 16.8 per cent, the Nifty FMCG 25 per cent, the Nifty Auto 57.2 per cent, and Nifty Realty 87 per cent.

"This is the right time to park some funds in the bank, real estate, and auto sector as a whole from a medium to long term view as markets will, now, price-in lower interest rates in India as well," said Vikas Sethi, managing director, Sethi Finmart.

All eyes on RBI

Given the jumbo rate cut by the US central bank, analysts, back home, expect the Reserve Bank of India (RBI) to follow the Fed's suit sooner than later.

The deep 50-bps cut by the Fed, extended by another 50-bps by the end of calendar year 2024, may put upward pressure on the Rupee. This may force the RBI to dilute its base position and focus on being 'actively disinflationary', analysts said.

Besides, the above-average monsoon could aid Kharif yield and ease food inflation. This would make the RBI's decision easier, and increases the probability of an October/December rate-cut, said a report by Emkay Global Financial Services.

IT, Pharma eye gains too

Apart from rate sensitives, the US Fed's confidence of achieving a 'soft landing' is expected to keep sectors like information technology (IT) and metals buzzing.

"If the US continues to cut rates on the back of a strong economy, metal, IT, and other export-oriented sectors like pharma are likely to reap benefits," said Vikas Sethi of Sethi Finmart.

On the bourses, the Nifty Metal, the Nifty IT, and the Nifty Pharma added up to 1.97 per cent on the NSE.

Word of caution

That said, the expensive valuations of the Indian stock markets may limit gains in each of these sectors, cautioned analysts.

"Despite rate cuts, investors should stay cautious in the markets as there won't be any fundamental change for the sectors," said Ambareesh Baliga, an independent market analyst.

Concurring with the view, Emkay Global said the banking sector is undergoing a structural adjustment in valuations due to lower growth, and may not be the best play on falling rates.

"In the short-term, adverse asset-liability management implies upfront margin pressures when the easing cycle starts. Banks may see a relief rally due to short-term improvement in liquidity and improved deposit growth. We, however, see this as an opportunity to lighten our positions and maintain our underweight stance," the brokerage said.

Furthermore, auto, and real estate sectors, too, have seen significant outperformance in the recent past and, thus, may see muted gains.

"While we believe there is potential for growth in these sectors (auto and realty), it may be more focused on individual stocks rather than the sectors as a whole," the report read.