Auto stocks have been on an upward trajectory since March lows despite two intermittent corrections, even when the benchmark indices are getting serious threats from bears.
In March 2022, the headline indices hit a one-year low as well as the lowest level since July 2021. And, last week too, both the Sensex and Nifty hit their fresh 52-week lows on the BSE, tracking weakness in the global counterparts given the faster policy tightening by the Fed and other central banks amid elevated inflation figures.
This suggests that the domestic equities have fallen way below the March 2022 low, though there was a bit of recovery later led by short covering in most beaten-down stocks.
“Markets are already pricing in a lot of bad news and outcomes. There is consensus that inflation will continue to be sticky, interest rates will rise, the US dollar will continue to strengthen, the oil will get to $ 150 a barrel and Ukraine situation will not get resolved in a hurry,” Abhay Agarwal, Founder and Fund Manager at Piper Serica said.
A very high probability of recession and stagflation has now been built into the models, the expert feels. Therefore, any positive surprise can provide a sharp turnaround to the market since there is a lot of under-ownership with cash sitting on the sidelines, Agarwal said.
But Auto index turned out to be the biggest outlier since March lows, even when the global mood is gloomy.
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If we go by the data points, the Nifty Auto index has rallied nearly 14 percent between March 8 and June 22, 2022, whereas in the same period, the Nifty50 index declined nearly 4 percent.
Among individual stocks, Mahindra & Mahindra rallied 40 percent during the window while TVS Motor rose 39 percent. Ashok Leyland has gained 34 percent and Eicher Motors 18 percent. Meanwhile, Maruti Suzuki, Hero MotoCorp, and Balkrishna Industries gained 10-14 percent. However, three scrips – Amara Raja Batteries, Bosch, and Exide Industries have been losers among the 15-share Auto index.
Even on June 23, the Nifty Auto index climbed 3.7 percent at the time of writing this report, as Maruti Suzuki, Eicher Motors, Hero MotoCorp, Ashok Leyland, Bajaj Auto, M&M, Tata Motors, and TVS Motor Company gained 3-6 percent. In fact, every stock in the sector was in the positive territory.
Even in the last two downcycles, especially after hitting March lows, the index has not seen a similar kind of correction as witnessed by the Nifty50.
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After March lows, Nifty50 dropped 13 percent from April 4 till May 12 and 9.6 percent during June 3-June 20. In the same period, the Auto index declined 6.6 percent and 7.8 percent, respectively.
One reason behind the recovery in the Auto space could be a fall in metal prices and supply chains seem to be gradually normalising. Steel is the main material for the automobile industry.
“Autos is another space that will benefit as steel prices cool off and supply chains for key components come back. The domestic demand is robust and a good monsoon will support rural demand, especially for two-wheelers,” said Abhay Agarwal.
Sonam Srivastava, Founder of Wright Research also said the auto sector which was the laggard in the previous year is surging since March as the supply side as well as demand issues are getting resolved.
“Volumes are increasing and with the latest government move to reduce steel prices, margins are going to ease. We have added 2-wheelers in our portfolios last month and we also expect tractors and passenger vehicles to gain traction as the rural demand recovers,” she added.
The Nifty Metal index crashed 34 percent from its high of the current year at 6,826 levels on April 11, to 4,491 levels on June 22, following a correction in global metal prices.
In fact, it was the biggest loser during the period, when Auto was flat and Nifty50 corrected nearly 13 percent.
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