Following the US Federal Reserve’s substantial rate cut of 50 basis points (bps) on Wednesday, analysts are advising investors to consider sectors sensitive to interest rates, such as banks, auto, and real estate. According to Rakesh Parekh, Managing Director and Co-Head of Portfolio Management Services at JM Financial, the recommended strategy is to invest in high-quality companies with a mix of rate-sensitive cyclical stocks and long-term growth compounding stocks.
Key Market Performances
On Friday, the Nifty Bank Index reached a new peak at 53,711, while the Financial Services Index hit an all-time high of 24,737. This surge was driven by private banks, with their sector index on the NSE also touching a record high of 27,001.5. Indices tracking consumption sectors, such as the Nifty FMCG and Nifty Consumer Durables, also soared to new heights, standing at 65,893 and 43,651, respectively. This surge reflects investor optimism that rate cuts will boost consumer demand.
Over the past year, the Nifty Bank has risen by 16.8%, the Nifty FMCG by 25%, the Nifty Auto by 57.2%, and the Nifty Realty by a remarkable 87%. Vikas Sethi, Managing Director of Sethi Finmart, suggests that this is an opportune moment to allocate funds to the banking, real estate, and auto sectors for medium to long-term gains, as the Indian market may also anticipate lower interest rates.
Impact of US Fed’s Decision on the Indian Market
The deep 50-bps cut by the US Fed, with a potential additional 50-bps cut by the end of 2024, could put upward pressure on the Indian Rupee. Analysts suggest that this may compel the Reserve Bank of India (RBI) to adopt an ‘actively disinflationary’ stance. Additionally, the positive monsoon could support Kharif crop yields and ease food inflation, making it more likely for the RBI to consider a rate cut in October or December, according to a report by Emkay Global Financial Services.
Gains Expected for IT and Pharma Sectors
Apart from rate-sensitive sectors, the US Fed’s optimistic outlook for achieving a ‘soft landing’ is expected to benefit sectors like information technology (IT) and metals. Vikas Sethi of Sethi Finmart noted that if the US continues with rate cuts amid a strong economy, sectors such as IT, metals, and other export-oriented industries like pharma could see significant gains. On the stock exchanges, the Nifty Metal, Nifty IT, and Nifty Pharma indices collectively gained up to 1.97% on the NSE.
Caution Advised Amid High Valuations
Despite the positive outlook, analysts caution that the high valuations of the Indian stock market may limit gains across these sectors. Ambareesh Baliga, an independent market analyst, emphasized that while rate cuts are favorable, they might not lead to fundamental changes for the sectors involved. Emkay Global echoed this sentiment, stating that the banking sector is undergoing a structural adjustment in valuations due to slower growth, making it less attractive during a falling rate cycle.
The brokerage firm also highlighted that while banks may experience a short-term rally due to improved liquidity and deposit growth, it sees this as an opportunity to reduce positions, maintaining an underweight stance on the sector. Similarly, the auto and real estate sectors, which have outperformed recently, may see limited gains moving forward.
“Although there is growth potential in the auto and realty sectors, it may be more beneficial to focus on individual stocks rather than the sectors as a whole,” the report concluded.
