Markets

Auto and finance stocks can bounce back even if the market crashes in July

  • Concerns of a global slowdown have put a stop in the bull run in the IT and pharma sectors, but analysts have two new picks to choose from.
  • While the auto sector has struggled and underperformed the benchmark Nifty 50 index, analysts believe easing supply-side pressures are bringing the shine back on this sector.
  • Finance sector, too, which remained largely unblemished during the Covid pandemic, has a chance to shine now that interest rates are surging.

Indian stock markets are flirting with bear market territory thanks to rising interest rates in the US – which has taken away the shine off IT and pharma sectors.

However, it’s not all doom and gloom as analysts believe investors can look at two sectors to put their money in – finance and automobiles.

Speaking to Business Insider India, Shrikant Chouhan, vice president at Kotak Securities highlighted that these two sectors could see a rebound after perhaps one more dip – most likely after the US Fed’s July meeting.

While finance and commodities have seen a major correction, the auto index has outperformed the benchmark Nifty 50 index.

Auto and finance stocks can bounce back even if the market crashes in July
How various Nifty indices have performed this yearNSE / Business Insider India / Flourish

Why are equity markets struggling?




Inflation, rising bond yields and supply chain constraints due to geopolitical incidents have led to major corrections in global equity markets.

India’s benchmark Nifty 50 index is down over 11% this year, while its US counterpart Nasdaq composite has seen a 30% decline.

Rising interest rates in the US and other developed markets have also made a dent in the forecasts of Indian IT giants like TCS, Infosys and Wipro, who were already battling increasing employee churn.

The pharma sector has been impacted, too, but according to Chouhan, vice president, Kotak Securities, this is more due to the ongoing investigations by US FDA into India’s pharma majors.

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While the auto sector has struggled and underperformed the benchmark Nifty 50 index, analysts believe easing supply-side pressures are bringing the shine back on this sector. Finance sector, too, which remained largely unblemished during the Covid pandemic, has a chance to shine now that interest rates are surging. Indian stock markets are flirting with bear market territory thanks to rising interest rates in the US – which has taken away the shine off IT and pharma sectors.


The connection between auto and finance

Rising interest rates are usually considered a positive for finance companies, since their primary source of income is the interest they earn on loans and advances. While interest on deposits have also seen a moderate increase, interest on loans is far higher in comparison, as is the quantum of loans.

With the
rural revival pushing tractor sales and kharif output expected to be ‘bumper’, analysts believe the auto sector will experience growth and the higher interest rates will be absorbed, which benefits both finance and auto sectors.

“People are paying their dues on time. Banks have become aggressive in vehicle finance now. Availability of finance is no longer a problem,” said a report by Spark Capital, stating that nine out of ten tractors are now sold on credit, as opposed to five a few years back.

The research firm states that it has observed that the demand for loans has gone up in the last two months in the construction and auto sectors, with HDFC, ICICI Bank and Axis Bank offering loans without any hassles.

As far as the auto sector is concerned, analysts at ICICI Securities believe that the headwinds for the sector are now “largely receding”. With key commodity prices now seeing major corrections of up to 35%, the gross margins of auto companies are expected to increase by 3-5%.

Analysts at Morgan Stanley also have a positive outlook on the auto sector, underlining that commodity and supply chain pressures have eased, volumes are strong and EVs are now a part of auto companies’ growth plans.

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