Nifty Metal index jumps 9% in last two weeks, 151% in FY21; does it have steam left?

Metal stocks have been hogging the limelight for a year as the increasing pace of economic recovery has augmented the demand scenario for the sector.

In the last two weeks, the Nifty Metal index has gained 9 percent, significantly outpacing the benchmark Nifty which is up about a percent.

In the financial year 2021 (FY21), the Nifty Metal pack emerged as the top sectoral gainer, surging 151 percent compared to the Nifty's 71 percent jump.

After the COVID-19 dealt a severe blow to the economy in the early part of FY21, metal stocks started to rise as investors anticipated economic recovery.

Improvement in demand, the shift of business from China to India and low base due to March 2020 selloff also bode well for metal stocks. The positive sentiment for the metal pack sustained through FY21 as the Indian government also showed strong intent to keep the infrastructure and manufacturing sector in focus.

Read more: Metal, auto, IT sectors more than doubled in FY21

After COVID-led disruption, top economies have bounced back sharply and governments do not want the pace of recovery to slow down.

Hemant Kanawala, Head – Equity, Kotak Mahindra Life Insurance Company pointed out that the US President Joe Biden’s proposal for an American Jobs Plan (AJP), totaling roughly $2.3 trillion in infrastructure spending over eight years is also a boost to the sector as the main areas of investment are transportation infrastructure, housing, etc.

"This has resulted in buoyancy in metal stocks as it is expected to create strong demand for industrial commodities like steel, copper and aluminium," said Kanawala.

The continuing surge in global demand and tightness in supply due to supply-side issues and production curbs in China has helped regional steel prices inch up further, Siddhartha Khemka, Senior Vice President at Motilal Oswal Financial Services pointed out.

"There has been a steady increase demand due to rise in industrial activity post the opening up of the economy and vaccination drive which is helping change the economic growth outlook. Further the new $2.3 trillion infrastructure spending plan by the US would further boost steel demand," Khemka said.

He expects margins for domestic steel companies to remain strong in the near term due to multi-year high spreads. With higher LME prices, margins for aluminum and zinc producers should also rise, Khemka believes.

The fundamentals of metal space indicate the sector is poised for further growth. As far as technicals are concerned, the index has resistance at 4,250.

"The Index has given the breakout of the falling trendline as well as a horizontal line which indicates positive momentum. Moreover, the index has been trading above 21 and 50-day moving averages with a positive crossover which points out strength in the counter," said Sumeet Bagadia, Executive Director at Choice Broking.

"A momentum indicator RSI and MACD both have shown positive crossover on the daily chart which adds more bullishness to the price. At present, the index has formed an open Bullish Marabozu Candlestick, which suggests a further northward journey in the index. At present, the index has resistance at 4,250 while support comes at 3,800."

After the recent rise in prices, consolidation in the near term is possible. However, since the economy is witnessing green shoots, the demand scenario of the sector will remain strong. One should bet on quality stocks in the sector from a long-term perspective, experts advise.

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