Nifty Metal up 5% in September so far; can metal stocks sustain these gains?
Metal stocks have been rising recently, driven by hopes of increased demand from China and domestically as economic growth picks up. The Nifty Metal index has gained about 5 per cent in September so far, outperforming the benchmark Nifty, which has risen by about 2 per cent.
PremiumMetal stocks have been quietly rising of late. In September so far, the Nifty Metal index has gained approximately 5 per cent, while the benchmark Nifty has risen by about 2 per cent. With the exception of August, when the metal pack fell by 1.5 per cent, the index has witnessed significant gains since March this year, driven by hopes of a revival in demand both from China and domestically as economic growth picks up.
Since September last year, the metal pack ended in the red only four times on a monthly basis. The Nifty Metal index suffered losses of 4 per cent and 19 per cent in January and February, respectively, this year because of strong losses in shares of Adani Enterprises after the Hindenburg episode.
Primarily because of this, the metal index has underperformed the benchmark Nifty this year so far. The Nifty Metal index is up 4 per cent while the Nifty is up 8 per cent year to date (as of September 6 close).
Shares of Adani Enterprises are down about 35 per cent this year so far while Vedanta's share price has declined nearly 22 per cent in the same period. Hindustan Zinc's share price is flat so far this year.
Rest all components in the Nifty Metal index are in the green this year, with shares of Jindal Stainless up with a whopping gain of 98 per cent. Shares of APL Apollo Tubes are up about 64 per cent. There are 10 stocks, out of the total 15, that have risen over 15 per cent this year so far.
Why are metal stocks rising?
China is a big factor for metal stocks. After China ended its pandemic-time restrictions, hopes soared that the world's second-largest economy will see a sharp rebound in economic activities. This gave a boost to metal prices. Additionally, the domestic macro environment is healthy which also supports the demand scenario for metals. There are expectations that globally central banks are done with rate hikes and now is the time for some easing as inflation is cooling. Experts see it also a reason behind gains in metal stocks.
"Expectations of a pause in rate hikes by global central banks and a series of measures announced by the Chinese Government to revive growth in their economy have helped sentiments towards metal stocks. The latest manufacturing PMI number from China has also come in improved igniting hopes of a revival in manufacturing activity and demand for metals across the globe," said Deepak Jasani, Head of Retail Research, HDFC Securities.
Aditya Gaggar Director of Progressive Shares underscored that China is the name when it comes to globally commanding the metal sector and hence its meltdown has been one of the factors for the downturn that the sector faced in the recent past. However, the recent developments of rate cuts with an easing of the mortgage policies are expected to aid the real estate sector in China, which is the key trigger for the growth of the metal sector. The positive reaction witnessed across the metal names anticipates a demand uptick in China (although the green shoots are yet to be unveiled).
Shrey Jain, Founder and CEO of SAS Online has similar views.
"The stimulus measures implemented by Chinese authorities to support the property sector, such as lowered mortgage rates, have exerted a substantial influence on the metal industry. In addition, despite global price fluctuations and disruptions caused by the monsoon, local market demand remains robust. This has led steel mills to implement multiple price hikes since August 2023, contributing significantly to the current bullish trend within the sector," said Jain.
Can metal stocks sustain gains?
The Chinese economy is still struggling. However, there are strong expectations that the government will announce steps to support its economy. This will be a positive factor for metal stocks. A lot will depend on the domestic demand scenario too. The interest rate trajectory by the Fed will also be a key factor for metal stocks.
Shrikant Chouhan, Head - Equity Research, (Retail) at Kotak Securities underscored metal stocks are moving upward mainly due to the rise in metal prices, expectations of stimulus for the economy from China and strong GDP numbers and the bullish sentiments are likely to continue if the Fed announces a pause on the rate hike and if China announces any package to the economy.
"Most of our preferred picks are close to their fair value. But I would say NMDC looks strong to buy even at the current levels. We have a buy rating on it with a price target of ₹150," said Chouhan.
Jasani of HDFC Securities suggests we need to closely watch the economic data from the developed economies and China for the next few months before getting over-excited about the prospects for metal stocks, though in the interim one can go long for trading with stoplosses in place.
While exports still pose pressures, the domestic demand remains robust, and the consumption story continues.
Gaggar of Progressive Shares underscored that steel prices, which were under pressure due to weak global prices and monsoon impacts, seem to have bottomed out and are gradually increasing. There have been multiple price hikes since August 2023 as demand for long/flat steel has improved amid increased traction from the infrastructure space.
The steel demand in India is further expected to pick up post monsoons as construction activities pick up pace with new projects coming on stream. The China stimulus measures are also expected to boost prices for ferrous metals in the international market, anticipating the steel prices to improve going forward.
"Fundamentally sound companies like Jindal Steel & Power (JSPL) and Tata Steel look good from the technical perspective as well where JSPL has given a breakout from the Flag and Pole formation for a target of ₹825. Even in the case of Tata Steel Ltd, the stock has given a breakout from a Cup and Handle formation for the targets of ₹147-172. Overall, India’s metal sector stands to benefit from strong domestic economic growth and gradual global recovery," said Gaggar.
Jain of SAS Online believes the days ahead for the metal pack are bright as most negatives are already priced in and the demand outlook remains robust as several infra projects see a pickup in execution.
"Regarding stocks, both JSW Steel and JSPL are currently trading at nearly their all-time highs but have managed to maintain stability at these levels. Meanwhile, other stocks such as Tata Steel, Nalco, and SAIL appear to be quite appealing on the charts when considering the risk-reward ratio," said Jain.
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Disclaimer: The views and recommendations above are those of individual analysts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decisions.
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