Metal Sector ends 2016 Like a King, IT and Pharma Lags

The calendar year 2016 failed to boost investor sentiment, as most of the sectors that led the race in the previous year failed to deliver this year. The Nifty Metal Index is on en-route to end the year on top of the sectoral chart, followed by banks and auto stocks while IT, Realty and Pharma are poised to finish as top laggards.

Sectoral Performance for 2016:

As of December 8, the Nifty Metal index was up 66 per cent for the year, followed by the Nifty Energy index, which gained 26 per cent, while Bank Nifty and Nifty Auto Index trailed with 10 per cent and 12 per cent rise, respectively. The Nifty IT index was the biggest laggard of the year 2016, down over 10 per cent, followed by the Nifty Pharma Index which plunged approximately 6 per cent.

Experts View:

Most analysts have already pushed the deadline for revitalization in corporate earnings growth by a minimum of six months after the Modi government demonetized high-value currency notes on November 8. After demonetization, some of the economy and consumption-led sectors saw noteworthy correction, which is expected to stabilize as the world enters Calendar 2017. But recovery in corporate earnings is still a bit away.

Experts say that they have seen a sudden fall in realty and FMCG stocks due to the demonetization drive, which has created short-term liquidity troubles in the system, leading to a strong impact on demand in these sectors. They are not expecting sales growth in the second half of FY2017, but thinks some recovery can be seen after the first half of FY 2018. They also believe that the market has already factored in the real impact of demonetization and there is less likelihood of a correction in these sectors due to the demonetization drive.

The Metal Space:

The metals space is recurring in nature. When the prices fall, companies make losses, but no sooner does the cycle alters, companies start posting profits implying high growth in analytical ratios, which are handsomely rewarded by the stock market. Analysts said that the metals cycle had turned up and so the very first year are the best in terms of stock price appreciations. However, in 2017 investors can omit them as the risk reward is not favorable and the elevated metal prices are already reflected in the profits. Any negative surprise can lead to quick fall in the stock prices.

Some other analysts feel that with Donald Trump coming into the picture, there could be some more benefit even if they are trading at lofty valuations. Metal stocks took a huge pounding in 2015. What originally started as a reaction to the fall got a big boost due to a global rally in all commodity prices including most metal prices. It is not clear whether this rally will continue, the fact that Trump has declared plans to rebuild the infrastructure in the US has led to cheerfulness that an increased demand for metals could be on the way.

On March 31st the finance ministry extended the safeguard duty on steel imports until March 2018 to protect domestic manufacturers from cheap Chinese imports. In February, it also set a minimum floor price for steel imports for six months to guard domestic producers hurt by cheaper Chinese imports. As a result India’s iron and steel product imports during the first six months of the current financial year 2016-17 stood at 3.598 million tonne (MT), as per the provisional data compiled by the Joint Plant Committee of Indian Bureau of Mines. In comparison, total imports during financial year 2015-16 was 11.753 MT valued at Rs.45,157.12 crore.

Another important point factoring the gains in the sector is that the Indian Steel Association (ISA) has urged the government to extend the current Minimum Import Price (MIP) regime, due to end on December 4, 2016. The ISA said with material benefit of MIP yet to boost domestic demand, this is necessary since the recent currency demonetization and imposition of anti dumping duty on met coke is expected to dent demand and production.

The Sectors that Lost:

IT and Pharma have been the top two losers so far this year. The IT sector had its own set of structural problems associated to the slowdown in growth due to automation of the business processes and a slowdown in the EU market. The revival in IT sector will take some time as these companies will take time to get attuned to the new realities. The growth projections for the next year has been slashed further to 8-9 per cent, leading to quiet performance, but any positive surprise next year would lead to a rerating of the sector as the base is already low. The weakling Rupee had been a thread of hope to them but failed to be the booster to the index.

On the other hand, Pharma stocks have been in a corrective approach after peaking at some point in 2014 and 2015. Increased vigilance of the USFDA has seen most Pharma companies facing some issue or the other with the US regulator. The reduction in margins of several of the generic drugs has also added to a weakening of sentiment for the sector.

Realty sector had been hit hard due to demonetization and have lost a good chunk in the market. While Nifty share price had gained 5.20%, it had lost 1.14% in the year so far and still counting. It will be worth watching at what level each index enters into the new calendar year and what the New Year has in cards for them.

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