Rate sensitives outperform in a buoyant market

Hope of a cut in interest rate by the Reserve Bank of India (RBI), above-normal monsoon and benefits accruing from the 7th Pay Commission recommendation (7CPC) have fuelled a rally in stocks of interest rate sensitive sectors. While the Nifty Auto index hit record high in intra-day deals on Monday, the Nifty Bank index hit its 52-week high level on the National Stock Exchange (NSE). Last week, the Nifty Realty index too had touched a 52-week high of during intra-day deals.

Since the presentation of the Union Budget when the overall market sentiment turned for the better, the Nifty Realty index has zoomed 59%, while Nifty Bank and Nifty Auto indices have surged 37% and 32%, respectively against 23% gain in the Nifty 50 index.

 

Among individual stocks, Bajaj Auto, Hero MotoCorp, Tata Motors and Mahindra & Mahindra (M&M) from auto and HDFC Bank, Lakshmi Vilas Bank, Bajaj Finance, Housing Development Finance Corporation, Gruh Finance and LIC Housing Finance from financial sector are quoting at their respective 52-week highs.

While the positive cues have already propelled these stocks to their respective highs, analysts say there could be more headroom to the rally, and investors could stock up from a medium-to-long term perspective.

Automobile stocks, for instance they say, are rallying on expectations of a recovery in the second half of the financial year (October - March), driven by a normal monsoon, implementation of the 7th Pay commission and expectations of further reforms in the upcoming monsoon session of parliament.

"We are positive on the autos sector, as the sector forms a core part of the India growth story, especially the recovery, which we believe would be extended, but consumption-led. Implementation of the 7th Pay Commission (7CPC) and recovery in rural India should ensure steady growth for the passenger vehicles segment over the next 12-18 months. Outlook for commercial vehicles, too, is positive with continued pickup in investment activities. However, the pace of growth may ebb a bit due to high base," said Tirthankar Patnaik, India Strategist at Japan-based Mizuho Bank.

Karvy Stock Broking expects volume recovery by mid-FY17 across the segments amid favourable monsoon benefitting rural India as well as the overall economy. It expects the commercial vehicle (CV) cycle uptrend to continue for next two - three quarters, and sees a sharp rebound in tractor sales.

On the other hand, CLSA recommends increasing exposure to the real estate, banking and financial services sector in the backdrop of increased expectation of a cut in interest rate by the RBI.

"Monetary easing expectations are rising in India. GREED & fear would advise investors to increase exposure to Indian interest rate sensitive stocks most particularly in the housing finance and residential property sectors where the passage of a law in March bringing long overdue regulation to that sector has created the backdrop for a new property cycle," wrote Christopher Wood, managing director & equity strategist at CLSA in his latest weekly note to investors.

"Investments in Indiabulls Housing Finance and DLF will be introduced in the Asia ex-Japan long-only portfolio with 3% each, while the existing investment in Prestige Estates will be increased by 1 percentage point. These investments will be paid for by removing the existing investments in Reliance Industries (RIL) and Baidu - a Chinese web services company," he adds.