Metal stocks rally; should you invest?

The rally was partly boosted by a World Bank report that expects the global economy to expand at 3.2% in 2014 as compared to 2.4% in 2013

 

Metal stocks gained ground on Wednesday, with the S&P BSE Metal Index moving up 1.5 per cent in intra-day deals. The S&P BSE Sensex and the CNX Nifty moved up one per cent each.

The rally was partly boosted by a World Bank report that expects the global economy to expand 3.2 per cent in 2014 as compared to 2.4 per cent in 2013, with growth picking up in both developing countries and high-income economies. However, it has lowered its India expectations from the earlier estimate of 6.5 per cent to 6.2 per cent now.

“Global GDP growth is projected to firm from 2.4 per cent in 2013 to 3.2 per cent this year, stabilising at 3.4 per cent and 3.5 per cent in 2015 and 2016, respectively, with much of the initial acceleration reflecting stronger growth in high-income economies,” says the World Bank’s Global Economic Prospects (GEP) report.

It adds the firming of growth in developing countries is being bolstered by acceleration in high-income countries and continued strong growth in China. However, it warns that growth prospects do remain vulnerable to headwinds from rising global interest rates and potential volatility in capital flows, as the US Federal Reserve (US Fed) begins withdrawing its monetary stimulus.

“We expect developing country growth to rise above five per cent in 2014, with some countries doing considerably better, with Angola at eight per cent, China 7.7 per cent, and India at 6.2 per cent. But it is important to avoid policy stasis, so that the green shoots don't turn into brown stubble,” said Kaushik Basu, senior vice-president and chief economist at the World Bank.

Shining bright
Analysts suggest a pick-up in global growth, specially in China, could provide a fillip to the metal sector by boosting demand. Besides, Indonesia banning export of select minerals like nickel, tin and bauxite will keep prices of these commodities firm in the global markets, analysts say.

The S&P BSE Metal Index rallied 1.5 per cent in intra-day deals, outperforming the benchmark indices, the S&P BSE Sensex and the CNX Nifty, as noted earlier. Among individual stocks, NMDC (up three per cent), Hindalco (up 2.4 per cent) and Sesa Sterlite (up two per cent) were among the top gainers.

Coal India was also on investors’ radar after the company announced a dividend payout of Rs 29 a share, pushing the scrip up by 1.8 per cent to trade at Rs 295.10.

“The outperformance of the S&P BSE Metal Index has been on account of a rally in Coal India that enjoys a healthy weightage in the index. The situation will be favourable for metal companies given the situation in Indonesia that banned exports of select mined products. As a result, metal prices have started to move up in the global market, a positive for Indian metal companies,” says Deven Choksey, managing director, K R Choksey Securities.

“The World Bank report could also have had a rub-off effect on these counters. One can invest selectively in the metal pack in counters like Sesa Sterlite, Hindalco and Tata Steel.”

“The metals and mining sector have outperformed the broader indices over the last quarter on expectations of a revival in economies of developed world. A weaker rupee would continue to support earnings. Hindustan Zinc and Coal India remain our top bet in the metals space. We believe realisations for the mining space in India are close to their bottom and the cash balance provides downside support to these stocks,” suggests a report on the sector from local brokerage IIFL.