Cracking Rupee has become an every-day story these days and ill effects of currency depreciation are being felt even in common man’s life now. Fall in rupee value has done more bad than good. Exports have not benefited much for variety of reasons including slowdown in European economies. Industries that directly depend on imports are the ones that have come in the firing line. Moreover, there are industries which may not have otherwise been affected directly with the fall in rupee have also taken a hit due to macro-economic changes rupee depreciation has brought in.

Some of them are important sectors and have fallen out of favour with investors. In this article we analyse, what has changed for them and would also discuss the outlook. Let’s first look at who all are affected…

On a Slide?

(Data as on July 22, 2013)
(Source: ACEMF and PersonalFN Research)

From the start of this year, widely tracked diversified largecap index, S&P BSE Sensex has given about 3% returns on absolute basis whereas Auto, Capital Goods, Banking and Real Estate companies have lost sharply.

What has changed for them?
Although dynamics driving growth in each of aforesaid sectors are different from one another; they have one thing common in them. All are sensitive to movement of interest rates, although to greater or lesser degrees.

Interest rate scenario
Huge current account deficit is blamed for the poor performance of rupee. A number of steps have been taken to arrest the slide in rupee. Besides, as a curative step, RBI has been trying to suck out the liquidity to stabilise the currency. It is now feared that RBI may tighten the reins on monetary policy. This has been affecting the market sentiment about these sectors.

Current state of interest sensitive industries
Real Estate and capital goods have been struggling since global economy slipped into recession in 2008. Their fundamental are badly shaken. Increasing imports from China are intensifying competition for domestic manufacturers. Industrial growth captured by Index of Industrial Production (IIP) shows that barring occasional spikes, capital goods sector has been facing turbulent times. Since corporate spending on acquiring new capital assets (popularly called capex) has not revived yet, Capital Goods industry is showing anemic growth. Less capital spending is also affecting growth of real estate sector. Furthermore, companies belonging to Real Estate sector have piled up huge debt which they are finding difficult to serve. There seemed a ray of hope when RBI started slashing policy rates in April 2012. Falling interest rate has a positive effect on growth of interest rate sensitive sectors. For capital goods producers and realtors, it serves two purposes. It helps them reduce interest outgo on outstanding debt and improves growth prospects as fall in interest rate is important for capex cycle to revive in emerging economies such as India.

Although relatively less affected, Autos and Banks are also having a tough time. Car sales are down almost for 8 months in a row now. Labour unrest has been a common problem almost for all major auto companies. Amidst falling volume growth and unstable currency, auto companies are finding it difficult to tide over the problems at hand.

On the other hand, Banks are battling on various fronts; asset quality, mismatch in credit and deposit growth and so on. It was believed that worst for banking sector was over and asset quality may not deteriorate further. Rate cuts were seen as a positive for banks but steps taken by RBI recently to stabilise currency, have affected the prospects of Banking sector.

Outlook
Chances of further rate cuts by RBI have substantially diminished. Strengthening currency would be on top of central bank’s agenda. Under existing market conditions, possibility of a rate hike cannot be ruled out. This paints a grim outlook for interest rate sensitive sectors which are struggling at the moment.

PersonalFN is of the view that investors should be wary of sector specific investment opportunities and avoid investing in sector focused funds. On the contrary, diversified opportunities funds should be considered as they carry lesser risk. Job of assessing opportunities in a specific sector should be left to professionals. Investing in a fund that is well-placed to benefit from opportunities present in various sectors is imperative.

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