Realty stocks not out of woods yet

CNBC-TV18s Executive Editor, Udayan Mukherjee -

The only defense, this morning is that bank stocks, probably saw it coming and priced quite a bit of in because the seriousness of the underperformance in the bank stocks has been huge. To that extent it might have priced in quite a bit of this bad news already.

But as I started off by saying this is not the end of it. There could be much more to come, there could be more CRR, repo moves in the future. We have not even seen inflation at 10% and probably that is where we are headed. So when those headline numbers hit us. Can the Reserve Bank of India (RBI) move once again? I think it is entirely possible.

At best what might happen is that the bank stocks after falling this morning once may not fall too much, so you probably get 3-4% cuts in the bank stocks this morning as a knee-jerk and then it does not fall too much more. But can bank stocks bounce back substantially in this kind of a rising interest rate scenario? I doubt it very much. Because that is the lingering fear that we have started another process of tightening with 25 bps and maybe rates will go up more in the system and maybe lending growth will be crunched down quite significantly during the next few quarters. This is not an environment where bank stocks will outperform.

One year from now if and when inflation cools down, interest rate starts coming off. Can you take that bet and buy bank stocks after the fall? Sure you could. But that is a very long-term bet; right now I do not think you should expect outperformance. Today, will the bank stocks fall 8%-10%? I doubt it very much. They will probably fall 3-4% and then try and stabilize because much of the damage has happened already.

This is also not a great environment for auto stocks to outperform because the auto companies have been crying about higher interest rates for sometime, rates will go up further from here. In any case banks are becoming extremely stringent about lending for autos because of NPA issues. So I do not think two-wheeler stocks or commercial vehicle stocks should do anything special this morning. They had a bit of a bounce back and I think they will go back to where they came from.

DLF, somebody was buying yesterday but today again you get a rough rap on the knuckles. So real estate probably the outperformance of the pullback will get stymied there as well. So it is true that part of the damage is in the price but even so I do not think these stocks are out of the woods.

I expect PSU banks will and probably to that extent their net interest margins might get a little bit of a relief, so that is one way to look at it. But the other way to look at it is that if you go and look back at history, I do not think banks typically do well in rising interest rate scenarios. Maybe part of the reason is the legacy reason of bond yields affecting PSU banks very disproportionately and to that extent some of the problem has been dealt with the hold to maturity moves. But I still think that rising interest rate scenarios are not conducive for bank stock outperformance because that is really how bank stocks move. Maybe there is a little bit of relief to a net interest margins if lending rates also go up with rising deposit rates. Is that the tree that you will want to be barking up in the near-term? I suspect not. It has to be a longer-term call; at least 6-9 months out if you are buying bank stocks today because in the interim probably they will not make you any money, probably lose you.