Brokerages bullish on interest rate sensitive sectors in 2008

Brokerages bullish on interest rate sensitive sectors in 2008

Mumbai: Despite relatively high valuations of Indian stocks, concerns over slowing industrial production and corporate profit growth, and fears of a potential global economic slowdown, most big international and domestic equity brokerages say they are bullish on select themes and the overall growth of India’s equity markets in 2008.

Sensex, the benchmark equity index of the Bombay Stock Exchange (BSE), gained some 43% this year, moving from 13,942.24 in January to 20,030.83 mid-December. The National Stock Exchange’s (NSE) broad-based 50-stock Nifty index gained about 50% during the year. Some of the sectors that have outperformed the Sensex in 2007 include metal, capital goods, realty, power and banks.

Despite their heady growth, these sectors continue to be on the brokerages’ priority list for 2008. But the overall focus seems to be shifting to interest rate sensitive sectors such as automobile, real estate and banking. This is because most analysts say that the Reserve Bank of India may not be able to stick to its current policy rates for long. Once the rates are pared, these sectors will benefit the most.

“Interest rate sensitive sectors could outperform during 2008," predicts Manishi Raychaudhuri, head of UBS India equity research at UBS Securities India Pvt. Ltd, a subsidiary of Swiss bank UBS AG. Adds Ketan Karani, vice-president of equities at Kotak Securities Ltd, the brokerage arm of Kotak Mahindra Capital Co. Ltd: “If there is a rate cut, the entire market will be re-rated."

“We expect a rate cut in the next three four months. We are bullish on the four-wheeler segment apart from infrastructure, real estates, power, banking, financial services," said Manish Sonthalia, vice-president of equities at Motilal Oswal Securities Ltd.

Sudip Bandyopadhyay, chief executive of Reliance Money, the brokerage arm of listed Reliance Capital Ltd, also subscribes to the view that India’s central bank is under pressure to cut rates.

UBS Securities India has already raised end-2008 target for the Sensex from 19,000 to 22,600. So far, UBS is the only brokerage that appears to have formally fixed a Sensex target for next year.

“Continued positive surprises in earnings and stable earnings growth are the key themes driving the market in 2008," said Raychaudhuri. “Large capital is awaiting Indian equities. This includes fresh money from foreign institutional investors (FIIs) and from the domestic mutual funds."

Both Namit Arora, a senior executive at Morgan Stanley India Securities Pvt. Ltd, who looks after the US investment bank’s proprietary trading in Indian securities, and Pramod Kasat, a director at global markets Deutsche Bank AG, are also bullish on capital inflows to Indian equities and the benchmark index’s growth during 2008. CLSA Asia Pacific, a FII with substantial investment in Indian stocks, is one of the few firms that says Indian stocks are expensive at the moment. The Hong Kong-based firm is currently underweight on India, points its chief strategist Christopher Wood. In his latest report on Asia strategy, released on 13 December, Wood recommended 11% weightage for India, 0.9% lower than the MSCI AC Asia ex-Japan weightage.

Wood also warns investors against a potential bubble formation in emerging markets. “Future financial accidents or crises will accelerate Fed easing to the ultimate benefit of the next bubble candidate which remains Asia and emerging market assets, including equities and property," he said.

Rob Subbaraman, the Asia economist of Lehman Brothers Holdings Inc., in a report on economic outlook for 2008 released last week, said the region (Asia ex-Japan) is well placed to weather a moderate global economic slowdown but it will be hit hard if there is a sharp global economic downturn. “With central banks behind the curve, many Asian countries by 2009 could be showing the hallmarks of overheated economies: high inflation and asset-price bubbles. (Markets such as) Hong Kong, India and Singapore seem most at risk," he said.

While global economic slowdown could adversely affect Asian markets, domestically driven Indian market is relatively insulated, argued Raychaudhuri of UBS, who bets on the continuation of strong investment cycle in infrastructure and industrial expansion.