Indian metal stocks become attractive after massive underperformance and signs of recovery in China, says Jefferies

• Heightened macro concerns hit metal stocks despite some improvement in China’s demand.
• In the first two months of 2023, China's aluminium imports rose 11.3% on year as buyers anticipated improving demand for the metal following the country's reopening from Covid restrictions.
• The covid restrictions, which impacted industries in China, were abruptly lifted in December 2022.

Most Indian metals stocks have been underperforming benchmark indices and their global peers in 2023 despite some improvement in China’s demand, due to heightened macro concerns.

In 2023, metal prices have fallen aggressively in tandem with the broader market due to the emergence of the banking crisis in the US and the ongoing tightening by central banks across the world to curb inflation.

“The US-based Silicon Valley Bank's collapse and the ensuing fall of Credit Suisse shares had a significant effect on the global market, which put pressure on metal prices. Positive sentiments were overshadowed by negative ones as the improvement in Chinese economic activity in the first two months of 2023 did not result in a rise in metal prices,” said Saish Sandeep Sawant Dessai, research associate- base metals at Angel One.

Signs of recovery in China
In the first two months of 2023, China's aluminium imports rose 11.3% on year as buyers anticipated improving demand for the metal following the country's reopening from Covid restrictions.

Manufacturing activity in China, the world's second-largest economy, expanded at the fastest pace in more than a decade in February as production increased after the lifting of Covid restrictions in December.

Property prices in China have also stabilised with an increase in monthly home sales, say analysts.

“Property prices are starting to stabilise after sequential decline for 16 months in a row. Monthly home sales at China's top 100 real estate developers rose 15% YoY in Feb, albeit on a low base - first YoY growth since July 2021,” said a report by Jefferies.

The year 2022 was one of the worst years for China due to strict pandemic lockdowns and heightened infections.

China is one of the largest producers of steel and also among the world's largest consumers of the material.

Indian metal stocks offer a buying opportunity
Analysts believe that after a huge underperformance, Indian metal stocks are offering a good buying opportunity.

“China economic data is showing signs of recovery with manufacturing PMI rising to 11-year-high and property prices starting to stabilise. After a 23% fall in CY22, China export steel price is up 14% in CYTD 2023. Asian steel spreads are still 10% below long-term average though, and we see scope for further expansion. Indian metal stocks have underperformed most global peers CYTD (calendar year to date), and we see this as a buying opportunity,” said a report by Jefferies.

Indian metal stocks and its performance in 2023 so far
Source: NSE

Tata Steel and Hindalco Industries are top picks of analysts at Jefferies as they see a recent underperformance as a buying opportunity in Indian metals.

Source: Jefferies report and NSE


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