Bonds, fixed deposits suggest better options
Birla Sun Life Asset Management , the third-largest mutual fund, will cut holdings in automobile companies, state-owned banks and capital goods creators as the central bank’s fight against inflation will squeeze earnings in these sectors.
Old telecom companies may be a ray of hope despite the scandal in the sector that may hurt only the new entrants who in their eagerness to have a share of the pie seem to have circumvented rules. Investing in fixed deposit income may be a better option in the near term when rates are high, said a fund manager.
“We are seeing some challenges on the asset quality front and expect margin pressure to be higher in them,” said Mahesh Patil , head-equities at Birla Sun Life with assets of .Rs 64,000 crore. “We believe that asset quality headwinds may actually continue for some of the banks as has been vindicated in the quarterly results . The ability to pass on higher costs on the retail side is much better in which private sector banks have an upper hand.”
ICICI Bank , IDBI Bank and others have raised interest rates after the Reserve Bank of India ( RBI ) raised repo, the rate at which it lends banks, for a ninth time, by 50 basis points on May 3 to rein in prices. With interest rates already rising for the past year, defaults have increased and may rise further. “If you ask me whether there’s going to be an impact, yes, for some,” says Aditya Puri, managing director and chief executive at HDFC Bank . “But that will be well within their absorptive capacity, and without any systemic risk.”
Banks’ profitability is eroding as they are not able to pass on all the increase in their funding costs that have jumped about 300 basis points in the past year. If all the increase is passed on, demand for loans will slow. A basis point is 0.01 percentage point. The BSE’s Bankex is down 5.3% in a month.
Automobiles, a top performer last year, may also lag, given rising prices of cars and motorcycles and the cost of funding their purchase. “While we are currently overweight on auto and auto ancillaries , we would like to book some profits now as we are expecting moderation in the sector in terms of margins and volumes ,” said Patil.
Last year, the sector witnessed a strong 25-30 % volume growth. But given the current conditions, we expect a decline in sales which may impact margins.” Maruti Suzuki, which sells almost half the cars on Indian roads and Hero Honda, the largest motorcycle maker, have reported earnings that fell short of market expectations as high raw material prices ate into their profit margins. T
The benchmark Sensex, which is the worst performer in Asia this year, may continue to feel the pressure, with the threat of global economies sliding back to recession and the withdrawal of easy monetary policies. “Apart from poor economic data , global markets will be the key in post QE2 rule,” said Patil who owns RIL , Infosys and Bharti Airtel. “The global markets have been pretty strong. So, if the QE2 is withdrawn , we can see some impact.
Source: [Economic Times]
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