Nifty Metal index enters bear phase; analysts see more downside

The Nifty Metal index that hit a 52-week low 3,116.8 in intra-day deals on Wednesday, recovered marginally to end 3.15 per cent lower at 3,121 levels

Metal stocks have entered a bear phase (typically described as a fall of 20 per cent or more from peak levels), given the ongoing trade war concerns. 

The Nifty Metal index hit a 52-week low of 3,116.8 in intra-day deals on Wednesday but recovered marginally to end 3.15 per cent lower at 3,121. On a year-to-date (YTD) basis, the index has already lost 21 per cent, compared to a 4.2 per cent rally in the benchmark Nifty 50 index, data shows.

Among individual stocks, Tata Steel, Hindustan Copper, Vedanta, NMDC, and Welspun Corp slipped  between 0.3 per cent and 5.4 per cent to hit their respective 52-week lows. Jindal Steel was the top loser. It lost 7.2 per cent to close at Rs 184 on the National Stock Exchange.

Going ahead, analysts feel the Nifty Metal index can slip another 5–10 per cent from the current levels if fear over trade war escalates. In this backdrop, the fall in individual stocks could be higher at 10–15 per cent, they say.

“Companies are not doing any major expansion across the globe. Investment in infrastructure or building factories, too, is lacking. Given this, metal stocks are likely to underperform. Investing in this market segment is not a good idea. The Nifty Metal index is likely to end 2018 around 20–25 per cent lower on a YTD basis,” says A K Prabhakar, head of research at IDBI Capital.

The only solace the sector could find is in the steel segment, where prices could firm up post monsoon, on the back of a pick-up in economic activity. At the global level, recent news flow around possible output cuts by China could also be a positive for Indian producers, says a Jefferies report. Of the lot, Prabhakar recommends JSW Steel from a long-term perspective but at lower levels.

G Chokkalingam, founder and managing director at Equinomics Research & Advisory, also expects the metal stocks to slip another 10–15 per cent by the year-end if the current trade war concerns continue.

“Going forward, it all depends on the trade war momentum. Though there are no signs of any moderation so far, an escalation can see the Nifty Metal index dip another 5–10 per cent over the next few months,” he said.

“We find valuations of metals stocks to be marred by uncertainties around trade brawls that threaten to disrupt trade flows, coupled with decelerating downstream industry growth and an appreciating dollar index that precipitated the recent price correction in underlying base metals. We continue to monitor the developments closely, as earnings could come under pressure if commodity prices fall more than currency depreciation. Tata Steel, Hindalco and JSW Steel remain our top picks,” say Amit A Dixit and Meera Midha of Edelweiss in a recent report.