Soaring commodity prices now pose a serious threat to 31 companies or 46% of the free-float weighted market cap within the benchmark Nifty 50 index, according to global brokerage and research firm Bank of America Securities (BofA). The exposure to commodity risk is up by almost 75% since June last year. The report adds that owing to the jump in prices markets could consolidate. “Discretionary, Materials, Staples, Energy, Industrials sectors, in that order, are most at risk,” BofA Global Research report added.
According to BofA research, 54% of the free-float weighted market cap within Nifty, represented by the services sectors which include financials, IT, and telecom, have no exposure to commodities. 6% has limited exposure, while the rest 40% market cap has high exposure. “Among the sectors with high exposure, raw materials comprise 57% of sales for the Discretionary sector, followed by 36% of sales for Materials, 31% for Staples, 29% for Energy, 28% for Industrials, 27% for Utilities & 22% of sales for the Healthcare sectors.”
Inventories provide cushion for now
However, currently, stock markets have not seen the spike play out owing to inventories. The report noted that inventories range from 17-85 days, which are believed to have cushioned the impact of the rise in commodity prices. With consumer durables and auto firms announcing price hikes in January, the cushion now might have vanished. Further the same is expected to soon hit earnings growth.
“Our bottom-up analysis of the composition of commodity exposure suggests steel, cement, crude, coal, copper, aluminium, iron ore, palm oil, and caustic soda are the key commodities relevant for Nifty companies,” the report said. The price of these commodities are up almost 75% since last June.
Sectors to bet on
Nifty is sitting shy of 15,000, which is Bank of America’s year-end target for the index. Along with commodity prices, rising bond yields & potential localised lockdowns make BofA analysts believe that the continuation of a broad-based market rally is now unlikely. The global brokerage prefers industrials, materials, and financials at this juncture. “We shift our marginal OW stance on telecom and staples to NW and continue to remain UW on consumer discretionary, autos, IT and energy sectors,” they added.
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