Metal stocks outperform IT companies for the first time in five years

In 2021, the BSE Metal Index has risen 66% so far, its best performance in at least 12 years, surpassing the BSE IT Index, which has jumped 55% in the same period. This is compared to the rise of just 11% in BSE Metal Index and 57% in BSE IT Index in 2020. Both the sectors are the best performers this year.

According to Mitul Shah, Head of Research, Institutional Desk, Reliance Securities Limited, economies across the world opened up after the lockdown due to shortages of both base metals and ferrous, resulting in prices reaching several-year highs. This helped domestic companies post super normal profits in the last few quarters. “Moreover, with China, which accounts for the most ferrous and non-ferrous consumption 50%, is cutting production due to carbon emissions targets. This resulted in negligible exports which supported prices. Adding fuel to the fire European energy The crisis is because the cost of electricity has increased significantly, forcing aluminum and zinc producers to cut production, thus creating losses,” he said.

Shah said the metal preference, compared to IT, was a cyclical unlocked theme stock versus stable returns overall. “Thus the valuation catch with super normal profits vis–vis the IT sector has helped it perform better in 2021,” he added.

The BSE Metal index had been underperforming the broader indices over the past few years, and after hitting a high of 15850 in January 2018, slipped to a level of 5500 in April 2020.

However, analysts remain mixed about the metal’s rally in the coming year as prices of some commodities have started softening recently, putting a question mark on higher price stability.

The small-cap space as well as global commodities (such as metals, chemicals and energy) may underperform in 2022 as per BNP Paribas estimates, according to Sharekhan. Backseat in 2022 and investors should start paying attention to the quality aspect of companies. We believe that the industries considered to be the major beneficiaries of the revival of capital expenditure in the country are likely to outperform in the coming years. Analysts at the brokerage firm said financials (BFSI), cement, metals, industries and infrastructure are looking good for 2022.

Megh Modi, analyst at Prabhudas Lilladher, expects IT to be an outperformer compared to base metals in 2022.

“IT is an emerging field. Most companies in developing and underdeveloped countries are now turning to integrated IT systems, thanks to COVID-19. Base metals will not be stronger than IT in 2022 as most of the countries are unlocking themselves thus meeting the demand. China, which consumes 50% of the global consumption, has resumed production to 70-80%,” Modi said.

Meanwhile, consumer-centric sectors such as FMCG, auto and healthcare have lagged behind in their performance against benchmark indices Sensex and Nifty. The BSE Auto index is up 17% in 2021, slightly better than last year’s 13% jump. BSE FMCG and BSE Healthcare grew by 8% and 17% respectively in 2021, while it grew by 13% and 61% in 2020.

With a growth of 11% in 2021, BSE Bankex has improved significantly from a decline of 2% in 2020, though it remains an underperformer.

“The FMCG sector has always been regarded as a defensive sector, which comes with relatively low magnitude during economic downturns, while at the same time it grows at a lesser pace during up-cycles. Thus, being a non-cyclical industry, it exhibited the full spectrum of maximum cyclical business segments. In addition, the second Covid wave had a severe impact on the rural economy, with some impact on the FMCG sector as well. On the other hand, the banking sector has also seen low credit growth due to the impact of the pandemic and poor visibility has kept its valuation expansion within a certain range. This leads to its poor performance,” Shah said.