Credit Suisse downgraded its stance on the sector to “underweight” as it said that the surge in global steel price may have run its course. The global brokerage highlighted key emerging risks such as easing supply chain shocks, weakening demand in China and China’s efforts to curb speculation in commodity prices in the country.
Earlier this month, brokerage firm CGS-CIMB had termed the rally in steel stocks as “irrational enthusiasm” as it highlighted that supply tightness that has contributed to the surge in global steel prices may recede as production picks up in another two-three months.
With the outlook for one of the biggest outperformers of the year getting less bullish, investors are likely to rotate some funds out of steel stocks, which have attracted sharp inflows from domestic institutional and retail investors, said analysts.
Allocation of mutual funds to metal stocks has risen from 2.1 per cent at the end of January to a 29-month high of 3.2 per cent in April, which may now be vulnerable to some reversal.
That said, the rotation of funds out of steel and some other metal stocks could be a blessing for other sectors. Credit Suisse suggested that as prices of key inputs such as steel and chemicals ease, end-user industries such as paints and cement sectors should benefit.
Credit Suisse has added both and UltraTech Cements to its model portfolio reflecting the conviction behind its call of top in global intermediate commodities.
Another sector that may benefit from the rotation of funds is banks. The sector has sharply underperformed the benchmark indices since Nifty Bank hit its all-time highs in February as the onset of the second COVID-19 wave triggered concerns over asset quality.
In recent weeks, the banking pack has moved up sharply making up lost grounds as the March quarter earnings and commentary of major private lenders and
eased concerns over asset quality issues that may arise due to the ongoing lockdowns.
Brokerage firm ICICIdirect believes that it is a matter of time before the Nifty Bank index moves above its lifetime high of 37,708 points and surges towards 38,600 points in the September quarter. Mutual funds, who have trimmed their allocation to private banks between January and April, may see an opportunity to generate strong returns if the rebound in bank stocks gathers steam.