Analysts aren’t as bullish about metals in 2022 as a few commodity prices have started softening recently

MUMBAI : Indian equities are poised to end 2021 with over 20% gains outperforming other peers in emerging markets. Despite the brutal second wave of covid and rising inflation, markets hit record highs multiple times during the year with pockets of super gains in select few sectors. Data showed metals have outperformed IT stocks in 2021 for first time in five years.  

In 2021 so far, BSE Metal index has gained 66%, its best performance in at least 12 years, outpacing BSE IT index which has jumped 55% in the same period. This compares to a rise of mere 11% of BSE Metal index and 57% spike of BSE IT index in 2020. Both the sectors are the best performers of this year.  

According to Mitul Shah, head of research, institutional desk, Reliance Securities Ltd as economies around the world opened up after lockdown shortages of both base metals and ferrous resulted in prices hitting multi year highs. That helped domestic companies to report super normal profits in last few quarters. “Further, with China which accounts for 50% for most ferrous as well as non-ferrous consumption has been cutting production due to carbon emission targets. This led to negligible exports thus supporting prices. Adding fuel to the fire is the European energy crisis as electricity costs increased substantially forcing Aluminium and zinc producers to cut output, thus creating a deficit," he said.  

Shah added that metals preference, overall ,as compared to IT was a cyclical unlock theme stocks versus stable returns. “Thus valuation catch up along with super normal profit compared to IT sector has helped its outperformance in 2021," he said.  

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

However, analysts remain mixed about metals rally in the year ahead as few commodity prices have started softening recently putting question mark on high price sustenance.  

As per ShareKhan by BNP Paribas’s estimates global commodities (such as metals, chemicals, and energy) along with the small-cap space could underperform in 2022. “As ultra-soft monetary policies are unlikely to sustain, liquidity-driven market may take a backseat in 2022 and investors must start focusing on the quality aspect of companies. We believe industries, which are considered to be key beneficiaries of capex revival in the country, are likely to outperform in the ensuing years. Financials (BFSI), cement, metal, industrials, and infrastructure look good for 2022," analysts at the brokerage firm said.  

Megh Modi, analyst, Prabhudas Lilladher feels IT will be an outperformer when compared to base metals in 2022. 

 “IT is a booming sector. Most of the companies in developing and undeveloped countries are now switching towards the integrated IT mechanism, thanks to covid-19. Base metals in 2022 will not be stronger than IT as most of the countries are unlocking themselves and thereby fulfilling the demand. China, who consumes 50% of Global consumption has resumed production to 70-80%," Modi said.  

Meanwhile, consumer focused sectors such as FMCG, auto and healthcare have lagged in their performance as compared to the benchmark indices Sensex and Nifty.  BSE Auto index has gained 17% in 2021 slightly better than a jump of 13% in previous year. BSE FMCG and BSE Healthcare rose 8% and 17% respectively in 2021 compared to a rise of 13% and 61% in 2020.  

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

 “FMCG sector is always considered as defensive sector, which falls with relatively lower magnitude during economic down fall, while at the same time it rises at lower pace during up-cycle. Thus, being a non-cyclical industry, it underperformed entire spectrum of maximum cyclical business segments. Moreover, second Covid wave had a severe impact on rural economy which also has some bearing on FMCG sector. On the other hand, banking sector has also witnessed lower credit growth due to impact of pandemic and poor visibility has kept its valuation expansion within certain limit. This lead to its underperformance," Shah said.  

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