Mumbai: Bears do not like metal— at least, bears on the Indian stock markets do not. When bears take charge of the stock markets, metal stocks tend to lose the most.
The BSE Metal Index, a grouping of 17 stocks, was the biggest loser on Monday when the Bombay Stock Exchange benchmark index Sensex witnessed its biggest single-day fall in absolute terms. The BSE Metal index fell by 13%, dwarfing the Sensex’s 7.41%.
Since 8 January, when markets entered correction mode, BSE Metal has lost 23% against the Sensex’s 6%. Close behind BSE Metal is the real estate index, which has lost 22%.
Among metal stocks, Ispat Industries Ltd lost the most at 27%, followed by Maharashtra Seamless Ltd with 23% on Monday.
A Mint analysis of significant falls in the Sensex shows that metal stocks bear the brunt of a falling market. In five out of six such occasions since 2005 when the Sensex has fallen 10% or more over a short period of time, metal stocks were the top losers among all BSE indices, including those that represent fast moving consumer goods, technology, banking, automobile, oil and health care stocks.
The other sector that loses the most is real estate, although its representative index on BSE is still very young.
Last year, between 24 July and 18 August, the Sensex lost 11%, but metal and real estate stocks lost 20% and 18%, respectively. Again, in 2006, when Sensex shed almost 30% between May and June, metal stocks lost 42%. At the time, there was no real estate index.
Analysts cite two reasons for the vulnerability of metal stocks. First, these stocks have had a fantastic run over the past year. And second, the correlation between the the metals industry and the overall economy is high.
The year 2007 was the best year for metal stocks with the metal index rising 121%, following a 42% rise in 2006.
“I would say that 75% of the valuation in these stocks was driven by fundamentals and 25% was the speculative interest. Investors were discounting every positive news development such as acquisition of mines by the metal companies and ready to give them higher valuations,” says Pawan Burde, senior research analyst at Angel Broking Ltd, a domestic brokerage.
“So, the correction was bound to come,” he adds. Because of higher valuations, his firm has a neutral (don’t buy, don’t sell) view of the sector.
Fears of a global recession could have spooked metal stocks. BNP Paribas analyst David Thurtell predicts that metal prices may fall as much as 15% in 2008 as a global economic slowdown curbs demand.
China, the world’s biggest consumer of metals, has raised interest rates six times in the past year, and increased limits on bank loans to slow its economy and curb inflation which is at an 11-year high.
“US consumption is likely finally to weaken as house prices fall,” said Thurtell. “Germany and the rest of western Europe are set to slow and Chinese export growth is heavily dependent” on the US and Europe.
Bloomberg’s Li Xiaowei contributed to this story.