Nifty Metal index climbs 240% since March 2020; should you book profit now?

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After a mild bullish run last week, domestic bourses continued to remain under pressure this week. Given the indecisiveness within institutional players and the inflation worries coming in from developed countries, markets continue to trade in a range-bound manner. The US equities witnessed profit booking majorly on account of inflation woes and Indian indices bore the same brunt. With commodity prices skyrocketing and liquidity flooding the system, inflationary tendencies are definitely looming over us, however, the situation seems to be under control at the current moment. Market participants are expected to remain vigilant as the market would be volatile in the coming week on rising inflation and the second wave of Covid-19 fears.

Ruminating on inflation, one of the major factors contributing to its rise is metal prices which have remained unfazed and have continued to climb past their multi-year resistance levels. Metals, especially steel, is rising since the last year when the pandemic crippled economies.

The Nifty Metal index managed to deliver 240% gains since March-lows last year, outperforming leading sectors throughout. Global demand too continues to remain resilient however production has still not caught up yet. In addition to this, China which has a majority share in the global metal trade, has been focusing on decreasing their production activities in-line with their goals of carbon neutrality by 2060. With these production cuts in steel, copper etc., supply-side constraints will exaggerate further pushing prices higher. Therefore, the rise in commodity prices will continue to play an influential role in inflationary tendencies going ahead but the real question is how long will the rally continue.

Given the multiple tailwinds of resilient demand and production cuts along with P/B ratio of a couple of steel stocks which had been historically trading over 2.3x at the top of their cycle, are currently still trading around 1.8x. Keeping these things in mind, our best case scenario is the momentum can still continue for some more time with short term corrections and traders can enter on dips and exit at appropriate resistance levels. However, fresh investments should be avoided as it can turn out to be risky for long term investors from here onwards, as despite the supernormal profits stock prices are refusing to go up.

Events of the week

Open-ended equity mutual schemes registered its second consecutive month of net inflows for April 2021. Though these inflows have fallen when compared to March buying due to the second wave, but the bigger picture is that DIIs have been net buyers in the equity segment to the tune of Rs 11,360 crore during April, the highest buying since June 2020. Net DII inflows trend remains positive which also implies that domestic investors continue to invest into equities on every dip and are keeping markets afloat, helping it swim through the hiccups in the near term. Investors are advised to continue with their stock-specific approach towards long-term investing rather than indexing.

Technical outlook

Nifty50 index behaved in line with global indices and closed in red on a weekly basis. The index also failed to retest the immediate resistance zone of 15,000, as it is facing supply pressure at higher levels. The benchmark index is lacking directional move after a prolonged rally and is now contained within a consolidation range of 14,400 to 15,000. Bank Nifty and other indices are also forming similar patterns. We maintain a bearish bias on the markets in the short term atleast till the immediate resistance levels aren’t broken.

Expectations for the week

Indian indices have shown sturdiness despite the increasing cases however sustainability at higher levels seems difficult if the situation aggravates. In addition, this fear of inflation flourishing in developed markets may continue to trickle down to India and keep our bourses under pressure. Stock specific volatility due to quarterly earnings cannot be ruled out. And going ahead, investors are advised to keep the company’s future guidance in mind before investing in stocks. Nifty50 closed the week at 14,677.8, down by 0.98%.

(The author is Head of equity research at Samco Securities. Views expressed are personal)