Rate sensitive stocks are on a roll. Is it a dead cat bounce?

The S&P BSE Auto index gained 2.4% in trade today, while the banking index, Bankex, moved up nearly 3%

Interest rate-sensitive stocks were on a roll in trade today, after the Reserve Bank of India (RBI) governor, D Subbarao, hinted that "perhaps" there was a need to reduce the reserves that banks have to set aside via the cash reserve ratio (CRR) or the statutory liquidity ratios (SLR).

The S&P BSE Auto index gained 2.4% in trade today, while the banking index, Bankex, moved up nearly 3%, outperforming the benchmark indices - the S&P BSE Sensex and the CNX Nifty that firmed up around 1.5% each.

Risk appetite further got a boost after country’s July exports soared 11.6 per cent to $25.8 billion, compared to $23.1 billion in the same month last year.  This is the highest growth rate in exports in 21 months, since October 2011.

“The sentiment got a boost after a robust trade data and comments from the RBI governor regarding liquidity easing. These comments somewhat hint towards a CRR cut in the near-term which is necessary to attain growth momentum," said Alex Mathews, head of research, Geojit BNP Paribas Financial Services.

Banking shares have slumped significantly in past couple of sessions after the central bank announced liquidity tightening measures to curb rupee’s fall. The rub-off affect was seen on automobile and real-estate sectors too, which declined amid fear that the demand for auto and property loans would shrink in the slowing economy.

"It's a bounce-back that we are seeing post sharp correction in the past few sessions. I expect one more round of correction in the banking space which will make valuations attractive," said Kajal Gandhi, an analyst at ICICI Securities.

Brokerages, however, continue to remain bullish on banks and other rate-sensitive stocks as there is underlying hope that the economy will recover in coming quarters.

“Most of the negatives have been discounted. Nifty has a near-term target of 5,850 and I think the downside is very limited from here. Every dip should be used to BUY stocks in sectors such as autos, banks, FMCG,” added Mathews.

So where should one allocate funds from a medium-term perspective?

ICICI Securities recommends a BUY on Bank of Baroda, PNB, Jammu & Kashmir Bank in the PSU space while HDFC Ltd and Yes Bank can be bought among the private banks.

Suresh Ganapathy and Parag Jariwala of Macquarie Research, however, maintain 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.

“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.

Geojit BNP Paribas, on the other hand, has a positive view on banks. Axis Bank, ICICI Bank, PNB, SBI and IndusInd are their top picks. Among autos, Maruti Suzuki, Mahindra & Mahindra, Hero MotoCorp and Bajaj Auto are the preferred bets, Mathew says.