China manufacturing PMI spooks metal stocks

Positive data on factory output in India fails to lift market sentiment

A slowdown in manufacturing in China, the world’s second-largest economy, hit the stocks of Indian metal companies on Monday, with the S&P BSE Metal index falling about three per cent, compared with the BSE Sensex’s 1.5 per cent fall. The CNX Nifty lost 1.4 per cent, barely managing to cling on to 6,000-levels.

The fall was despite data showing in January, India’s manufacturing sector expanded the most this financial year. The HSBC Purchasing Managers Index (PMI) rose to 51.4 in January from 50.7 in December. A reading of more than 50 shows expansion, while one below 50 indicates contraction.

China’s factory growth eased to an expected six-month low in January, owing to weak local and foreign demand. The official PMI fell to 50.5 from 51 in December, the National Bureau of Statistics said on Saturday. The fall emphasises concern China’s economy is stuttering and could be a drag on financial markets on Monday, as global investors, already nervous about capital flight in emerging markets, find another reason to sell riskier assets, analysts say.

Analysts remain cautious on the road ahead and advise investors to be selective in their approach. “The stocks corrected on the back of the Chinese manufacturing data announced last week. I think most metal counters had run up sharply. Though we have a negative view on most stocks in this space, we like Tata Steel and NMDC. One can buy these at current levels and expect a 20-25 per cent return through the next year,” says Bhavesh Chauhan, senior research analyst (metals and mining), Angel Broking.

Goutam Chakraborty, analyst (institutional research), Emkay Global Financial Services, said the meltdown in metal stocks on Monday may have been triggered by the disappointing data on manufacturing in China.

Analysts also blame a shortfall in iron ore supplies from Karnataka and the consequent rise in raw material prices for investors withdrawing from JSW Steel, as this may hurt the company’s profitability. However, Chakraborty says this has been the case for the past few months, adding the worst has already been factored in into the stock price.

Angel Broking’s Chauhan believes increasing steel production meaningfully in 2014-15 will be a challenge for JSW Steel, considering the slow rise in production from iron ore miners in Karnataka.