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As stocks trade off highs, is the rally in commodities over?

Nifty Commodities index, comprising names like Reliance Industries, ONGC, UltraTech cements, Vedanta and 26 others, has fallen about 23 per cent from 52-week highs hit in April

June 29, 2022 / 12:08 PM IST

Commodity stocks including metals, miners and energy names have seen profit booking in the recent months even as supply problems are far from over while prices of commodities have been choppy.

Nifty Commodities index, comprising names like Reliance Industries, ONGC, UltraTech cements, Vedanta and 26 others, has fallen about 23 per cent from 52-week highs hit in April –  at the height of Russia-Western World tensions.

Commodity stocks – especially from metal and energy sectors – were among the biggest gainers in the recent boom in prices led by burgeoning demand after the pandemic. However, as the demand is plateauing, prices have also decreased for many commodities.

Does that mean the super cycle in these names are over and investors should taper their expectations from now on, thus exiting the space? Not really, said analysts, who believe there could be another round of buying as the situation remains precarious.

“Commodity stocks have already fallen from their recent highs. But just because commodity prices are falling, one need not take a negative view of such stocks,” said Deepak Jasani, Head of Retail Research, HDFC securities. “However if the fear of recession in the US economy turns out to be true, then these stocks have scope to fall even more.”

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Many institutions and analysts have projected that a chance of recession in the US is greater now as the Federal Reserve has armed itself completely to battle inflation, which is at record levels.

But, even if the US economy falls into recession, and commodity prices continue declining, consumers of commodities can benefit from the fall in their prices, said Jasani. These include consumer staples, chemicals, durables, capital goods, logistics etc.

That said, there are some section of metals that are not likely to be impacted as the prices are holding on. JP Morgan in a recent report said though LME aluminum prices are back to Q1FY22 levels, zinc and oil prices are firm.

It said, thus, stocks like Vedanta could be a beneficiary. “Vedanta’s earnings in the near term look well supported. Within base metals, LME aluminum prices have fallen sharply (14 per cent in the last one month), zinc prices (-2 per cent) and oil (flat) have held up. For VEDL’s earnings and cash flows, LME zinc prices are relatively more important,” said Pinakin Parekh of JPMorgan.

Amid the kerfuffle, shares of auto stocks have started rising. In the last five sessions, it has risen 8 per cent as it is set to benefit from decline in metal prices. Stocks like M&M – which has a large order backlog and has launched new models as well – have hit their all time highs. This comes after years of underperformance in the sector.

Siddarth Bhamre, Head of Research, Religare Broking, said macro picture for the auto space was challenging in the beginning of the year with commodity prices going up. Higher inflation also dampened the sentiments.

“However, looking at the major fall in commodity space and talks of recession in the US, its likely that we may not see a significant rise in prices. All these factors which worked against auto space before will start favouring it and we expect both high growth and margin expansion to materialize in the sector,” he said.
Shubham Raj
first published: Jun 28, 2022 02:13 pm
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