Discover more from Finding Outperformers, by Aditya Grover
Why are Metals in limelight again?
Tracking inflation, liquidity & commodities
Hi, in this edition of ‘Finding Outperformers’, we are here to put a few pointers to explain to our readers why we are positive about metals as a sector to invest in. We shall talk about US inflation, China reopening, Japanese inflation & global financial liquidity impacting the commodity prices making them rally in the last 1-2 months. Besides that, we shall also discuss why the Indian government’s focus on Capex/Infra is again a crucial factor for Indian Metal shares to rally. Let’s get started!
The year 2021 was a rocking year for metal stocks, they doubled, and tripled as underlying commodity prices went up due to high liquidity & spurt in demand post covid hit 2020. The year 2022 witnessed demand moderation of commodities due to China lockdowns and Fed tightening causing a global economic slowdown. Well, here's what lies ahead for us in 2023-
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U.S. CPI Inflation Falling↘️
US inflation is the most critical data point the US Fed is focused on besides employment. It is generally now accepted by economists that it peaked around July-August of 2022 & has been falling well since then. With global energy (oil & gas) prices already easing after peaking due to the Russian-Ukraine war & impact of a high base last year helping the headline figure to ease in the major part of 2023, we believe the inflation can surprise the downside. The last data point in January came in at 6.5% which is down from the 9.1% YoY witnessed in July 2022.
Falling inflation would give comfort to the fed to be dovish in coming months & stop hiking rates post the upcoming FOMC meetup. Dovish fed shall support liquidity & economic recovery in the medium term, which is bullish for global metals.
The King is Reopening- Tracking China
China dominates the consumption and production of base metals aluminum, lead, nickel, tin, and zinc as well as iron, and steel accounting for half of the world’s consumption of Copper. As their government has removed almost all covid related protocols over the last 2 months, the current economic rebound being witnessed there seems so strong that it's driving the global metal prices, being the biggest consumer of metals.
Commodity prices in China which were trading at a discount to Indian commodity prices have suddenly now started trading at a premium. With the dovish stance of China's central bank expected to continue to support the property market & economy overall, the demand outlook stays positive for Metals in the short to medium term.
Japan’s Central Bank in midst of high Inflation
Japan's National Core CPI reading a few days ago came in at a multi-decadal high (41 years to be precise) at 4% annualized. Inflation has gone up in an economy that spent about 8 years in 'deflation' in the last 20 years & is known for its negative interest rates (which never fuel inflation) is quite shocking!
What's even more shocking is that in just 2 days, Japan's central bank BOJ left its interest rate unchanged at an ultra-dovish -0.1% (read carefully its negative!) maintaining the same rate it’s kept since 2016! Even though the BOJ is expected to raise rates later in 2023 anyhow, their continued dovish stance is positive for metals in short term.
India’s Capex/Infra Focus
The domestic demand outlook remains positive due to the continued focus of the government on increasing the proportion of investment in the economy. Our last post was also about the upcoming Indian budget & infrastructure focus, you can find it here :
Well, time would tell how much steam metals rally has, but the year 2023 can possibly be another shining year for metals because of the reasons mentioned above. We are positive on Hindalco & Tata Steel within the metals sector.
That’s it for today, see you at the next post!
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Personal & client investment/interest in the shares exist; this isn’t investment advice; DYOR (do your own research) is recommended; Investing & trading are subject to market risk; the Decision maker is responsible for any outcome.