Soaring commodity prices are now a serious threat to 31 companies, or 46% of the free float-weighted market capitalization of the benchmark Nifty 50, according to global research and brokerage firm Bank of America Securities (BofA). Exposure to commodity risk is up almost 75% since June last year. The report adds that due to rising prices, markets may consolidate. “The discretionary, materials, commodities, energy and industrials sectors, in that order, are the most at risk,” added the BofA Global Research report.
According to BofA research, 54% of the free float-weighted market capitalization within Nifty, represented by service sectors that include finance, IT and telecommunications, have no exposure to commodities. 6% have limited exposure, while the remaining 40% market cap has high exposure. “Among high-exposure sectors, commodities represent 57% of sales for the discretionary sector, followed by 36% of sales for materials, 31% for commodities, 29% for energy, 28% for industrial products, 27% for public services and 22% of sales for the Health sectors. “
Inventories provide a cushion for now
However, currently the stock markets have not seen the peak play out due to stocks. The report noted that inventories vary from 17 to 85 days, which would have cushioned the impact of rising commodity prices. With durable consumer goods and auto companies announcing price hikes in January, the cushion may now be gone. In addition, the same is expected to hit earnings growth soon.
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“Our bottom-up analysis of the composition of exposure to raw materials suggests that steel, cement, crude, coal, copper, aluminum, iron ore, palm oil and caustic soda are key products relevant to Nifty businesses, ”the report states. The price of these raw materials has increased by nearly 75% since last June.
Sectors to bet on
Nifty is below 15,000, which is the Bank of America’s year-end target for the index. Along with commodity prices, rising bond yields and potential localized lockdowns, BofA analysts say a continuation of a widespread market rally is now unlikely. Global brokerage prefers industries, materials and financial services at this point. “We are moving our marginal OW position on Telecom and Commodities to NW and continue to remain UW on Consumer Discretionary, Automotive, IT and Energy sectors,” they added. .