Commodity stocks still in favour after sharp run-up

The top gainers in the metals and mining space so far in 2017 are Jindal Steel & Power Ltd, Tata Steel Ltd and Hindalco Industries Ltd. Photo: Bloomberg

Mumbai: Commodity-linked stocks have seen a strong rally so far in 2017 since bottoming out in early 2016, and analysts are still upbeat on the prospects of the pack, as the outlook for commodities remains optimistic.

Improving economic prospects of developed economies, and the spillover effects on the developing economies, are likely to keep the commodity prices firm in the medium to long term.

BSE Metals and BSE Oil & Gas indices are up 40.75% and 32.66%, respectively, so far this year, after logging gains of 36.65% and 27.17%, respectively, in 2016.

The top gainers in the metals and mining space so far in 2017 are Jindal Steel & Power Ltd, Tata Steel Ltd and Hindalco Industries Ltd, which have gained 149.28%, 80.96% and 62.37%, respectively.

Currently, these companies have 10, 24 and 25 “buy/overweight” ratings, respectively, compared with 4, 12 and 24 such ratings at the end of 2016, data from Bloomberg showed.

“The recovery in global economy is happening—specifically developed economies, and it is spilling over the emerging economies,” said Dhananjay Sinha, head of research at Emkay Global Financial Services Ltd, pointing that this has been a key driver for metal prices globally.

MCX metal index gained 12.52% so far this year and in 2016, it gained 17.86%.

“As long as that hypothesis is in place, metals companies which have been participating in the rally in the last two years will continue to do so,” said Sinha, pointing out that the rally started after bottoming out in early 2016. “People were underweight in the metals space and it is possible that we could see re-allocation in favour of these companies,” he added.

While metals did face near-term hurdles, commodity experts rule out a correction for them.

“//In The near term, there is softer tone setting up,” said Kaynat Chainwala, research analyst, base metals, Angel Commodities Broking Pvt. Ltd.

“With the Chinese crackdown on pollution, it has asked companies to cut down aluminum and steel production to prevent smog. This led to a rally in aluminum and steel-linked metals such as nickel and zinc. We need to see if the output cuts go as planned,” said Chainwala.

“With the Chinese crackdown on pollution, it has asked companies to cut down aluminium and steel production to prevent smog. This led to a rally in metals such as nickel and zinc. We need to see if the output cuts go as planned,” said Chainwala.

She pointed that in the light of the curbs in the financial sector in China, the Chinese economy may stabilize for a while instead of seeing strong growth.

“We need to remember that China is the driver of growth for metals,” she said

“That said, I am not expecting a sharp correction from here. The mood may be sombre for a while, and it may pick up again after a while,” added Chainwala.

Others shared the view.

“From a one to one-and-a-half year perspective, the prospects for industrial metals look good. The near-term jitters from China should fade out going ahead,” said Kishore Narne, associate director, Motilal Oswal Commodities Broker Pvt. Ltd.

“While a near term correction is not ruled out, zinc, aluminum, copper and nickel look good from a longer term horizon. The outlook for crude is marginally positive. Fundamentally, I don’t see a strong upside for crude from here on,” added Narne.

Apart from metals, energy companies were also on an upswing given the traction in crude oil prices.

Brent crude has rallied 42% to $63.64 per barrel since 21 June 2017. For year to date, it is up 12%, after climbing 52.41% in 2016.

Among the components of BSE Oil & Gas index, energy to telecom conglomerate Reliance Industries Ltd has rallied the most year to date, with a 75.82% gain. Next in line is gas distribution company Indraprastha Gas Ltd, which added 71.45% in the same period.

“There is high probability oil may breach $70 a barrel in the medium term, rather than plummet down to $50 a barrel,” said Ajay Bodke, chief executive and chief portfolio manager at brokerage Prabhudas Lilladher Pvt. Ltd.

“There is still some steam left in the rally, because the driver is global economy. These companies exhibit maximum operating and financial leverage as they are highly capital intensive,” Bodke said, referring to metal and energy companies.