Metal stocks turned out to be the worst performers in the week, which saw Sensex and Nifty50 touching fresh record highs.

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The S&P BSE Metal index was down by about 3.5 per cent for the week ended September 24, and experts feel that any relief rally on D-Street could be used to exit metals stocks amid the Evergrande crisis and China slowdown.

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The metal index has underperformed by 19% compared to the Nifty50 over the past 2 months and corrected by about 10% from the recent peak.

“Our contra call of metals UW over the past couple of months covered a vast swath of global and domestic data, exploring lead indicators, long term structural and cyclical trends, study of used based sectors, the impact of exponential price rise on P&L, balance sheet structure and study of valuation matrices of metals companies,” JM Financial said in a report.

“Considering all that, we believed it was germane to revoke our earlier post-covid bullish call on metals since Mar’20; we see the sector as a prolonged underperformer,” it said.

The report further added that “our conviction has strengthened after the recent events like Evergrande Crisis, China slowdown and our reading of lead indicators from the most buoyant steel markets in Europe and the US,” it said.

The report highlighted that a contraction in demand for steel from Chinese residential housing, which contributes a third of China’s steel consumption and 18% of the world’s consumption, should have a reasonable impact on global steel demand (~2% for every 10% drop in housing sector steel consumption).

Following the rout from the Evergrande shock last week, the market rebound in the hope of an early resolution from the crisis, amid news of service payment rescheduling for a small part of the outstanding liability of USD 300bn.

Receding global concerns over the Chinese real estate giant overshadowed the switch of US Fed from a dovish taper stand to a hawkish one.

“But, we think the Chinese housing sector problems have not gone away as Chinese authorities are planning for a measured implosion of the Evergrande Group instead of providing an outright bailout plan; as per media reports “China Makes Preparations for Evergrande’s Demise, Sep 23, 2021,” explained the JM Financial report.

Through Evengrande’s implosion, which would still attempt to take care of home buyers and suppliers’ interest, the message from China is very clear:

a)   Financial conditions for China’s housing construction sector will get fairly tight, both by way of institutions lending and household deposits,

b)   The Chinese government will allow market forces to carry out the necessary ablution in the construction and housing sector,

c)   It would reign in rising cost inflation especially in metals, which the Chinese government had been trying to control for several months, and

d)   Decline in demand will automatically bring down China’s steel production after the overproduction in 2021YTD (Jan Jul at 649mn tons, 8% YoY vs 3% growth in consumption projected for full-year 2021). This was also what the Chinese authorities were trying to instill.

Disclaimer: The views/suggestions/advices expressed here in this article are solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.