Moving away from stock herd

With the Bombay Stock Exchange Sensitive Index, or Sensex, falling by a little over 14 per cent in the past year, things are not looking so good for stock market investors. Even the top blue-chips have suffered. And, a sharp rise in interest rates has made many investors bearish on a number of interest-sensitive sectors.

While market experts keep saying there are a number of stocks available cheap, it is difficult to decide. Rising interest rates are a cause for concern. However, experts think a pause is round the corner. "Inflation may start cooling by January next year and rates could start to come down, maybe by March or April," says Vaibhav Agrawal, vice-president, research, at Angel Broking.

Since rate-sensitive sectors such as banking and real estate have taken a beating in the past year, these are likely to benefit once rates start cooling. The BSE Bankex has fallen 19 per cent in the past year and a lot of the scrips, both private and public sector, are trading at low levels, which analysts deem attractive. The BSE Realty index has shed close to 52 per cent over the past year. BSE Capital Goods has dipped 25 per cent.
 

CONTRA BUY

• Liquid enough for quick entry/exit;
• Stock trades below intrinsic value;
• You have ability to absorb losses;
• If quality of management is good;
• Financial history is better than peers

Pankaj Pandey, head of research at ICICI Direct, says one should look at the balance sheet of companies and not just the profit and loss accounts. He feels interest rates are likely to remain at elevated levels for a while to come. "With interest rates likely remain high, banks will suffer. From a balance sheet perspective, banking is a good option," explains Pandey.

Banking scrips are undervalued, as there is much concern on their non-performing assets (NPAs), on monetary policies and global issues. Still, if you look at the balance sheets, the NPAs are not alarming, which one cannot gauge from their profit and loss accounts.

Agrawal says large-cap private sector and a select few mid-cap state sector banks would profit once rates dip.

Pandey also said mid-cap cement firms could profit from a fall in rates. "This is because once rates cool, you will see construction activity picking up."

Real estate, Alex Mathew, head of research at Geojit BNP Paribas Financial Services, feels could profit from a dip in rates. "Realty has been hit badly over the last 3 years and is available at good valuations. There are a select large-cap realty scrips trading at a very low P/E," he added.

Saurabh Mukherjea, head of equity at Ambit Capital, says instead of looking at sectors, one should look at select stocks. "Indian equities are trading at a 40 per cent premium to other emerging markets and the growth here has been decelerating for the past 7 quarters. And, inflation is a huge concern. Instead of betting on a sector, look at select buys."

He says there are spots of value in power, real estate and banking. You can spot these by looking how much they are undervalued, the cash in the balance sheets and their finances.

Since interest rates are not likely to see a dip in the near future, it is obvious one should buy these with a long-term horizon. "At this juncture, there are going to be headwinds in the domestic and global fronts. You should stay invested in these for 12-18 months to reap benefits," says Agrawal.