As financials crash, should you take the plunge?

Bank Nifty slumped over 5 per cent in today's trade, marking its biggest percentage loss since July 2009.

Interest rate sensitive stocks cracked today after government imposed new restrictions on foreign exchange outflows and gold imports on Wednesday in a new attempt to support the rupee, which were also seen hampering an already slowing economy.

The S&P BSE Realty index dropped 6% in trade today, while the banking index, Bankex, moved down 5.5%, underperforming the benchmark indices - the S&P BSE Sensex and the CNX Nifty that slumped nearly 4% each.

Bank Nifty shed 5.7 per cent to close at its 52-week low of 9,450.85.

"Bank shares are to be completely avoided at this point. I would advise investors to conserve capital and do not rush into markets. The key support level for Nifty is 5,200 after it breaches 5,500 mark. There are only two sectors worth investing which are pharmaceuticals and IT as they may gain from depreciating rupee," said Vinay Khattar, Head of research & Vice President at Edelweiss Securities.

The top three private lenders dropped over 10 per cent in past one month.  ICICI Bank , country’s biggest private bank, slumped 14%, Axis Bank tanked 14.3% while the HDFC Bank declined 13% in the corresponding period.

Risk appetite further dampened on fear that the roll-back of US stimulus could spark selling pressure by the overseas investors in the equity space.

Rupee, Asia’s worst currency so far this year, fell to an all-time low of 62 per USD in today’s trade. The partially convertible currency traded at 61.86 against the dollar in late trades against the Wednesday’s close of 61.44 at the Interbank Foreign Exchange market.

"Seeing the US data so far, there is a fear that the tapering may be earlier than expected. My near-term target for Rupee is between 60-50-61.40," said NS Venkatesh, chief general manager & head-treasury, IDBI Bank.

Suresh Ganapathy and Parag Jariwala of Macquarie Research maintains a negative view on the banking space. “Stocks have corrected sharply and cheap have become cheaper. They possibly can get even cheaper. So valuation is a mirage and positive catalysts are missing," they point out in a recent report.  Hat is impor

“One should clearly be underweight (UW) in financials in our view. Specifically, avoid PSU banks which are very weakly capitalised. Valuations for them are deceptively cheap and on a fully adjusted basis (for NPLs and restructuring) the PSUs are trading closer to book value compared to 0.5x P/BV on a reported basis. We would recommend buying HDFC Bank, ICICI and Kotak Mahindra Bank as we prefer stocks with good earnings growth, high degree of earnings visibility and stable funding franchise," they add.

Apart from bank shares, capital goods shares also witnessed a sell-off on concerns that the economic slowdown would lead to drop in fresh order inflows and also hurt earnings going forward.

Bharat Heavy Electrical Limited (BHEL), Larsen and Toubro (L&T), Punj Lloyd, Jindal Saw, Crompton Greaves, Suzlon Energy and Bharat Electricals ended down 5-11% on BSE.