Metal stocks have increased by 30% over the past two months, and here’s the reason why.

In the last quarter, the Indian stock market moved cautiously, keeping the Nifty50 index within a tight 1,000-point band from 21,800 to 22,800. However, a notable shift occurred this week, as the index breached this boundary and achieved a new peak by closing at 22,952, even touching 23,000 at one point during the day. The market’s immediate future now hinges on upcoming developments, especially with the heightened anticipation of a significant victory for the incumbent government, a sentiment reflected in the current market dynamics.

This week’s market surge comes as we approach the crucial national election results, which are now just a week away. The market previously consolidated due to the volatility typically associated with pre-election periods, driven by foreign institutional investors (FIIs) pulling back. These FIIs chose to reallocate their investments to other emerging markets (EMs) during India’s election process, from the announcement of the first phase on March 20 to the final result declaration on June 4, lasting about two and a half months. During this period, India’s economic momentum decelerated as new policy initiatives and spending slowed, making it logical for FIIs to seek opportunities in other EMs, especially given the substantial 80% premium of MSCI-INDIA over MSCI-EM. This was also a period when the Chinese market saw improvements, with the government introducing measures to stimulate growth and address real estate issues, attracting FIIs away from India and making them net sellers in the Indian market over the past two months.

Another factor fueling the market’s upward movement is the early arrival of the southwest monsoon along the southern coastline, about two weeks ahead of its usual schedule. This was influenced by a cyclonic storm in the east-central Bay of Bengal, forming low-pressure systems. The early monsoon has brought relief to sectors like FMCG and Consumption, which depend significantly on rural demand and input costs. However, the severe heatwave in FY24 has negatively impacted agriculture and industries reliant on rural demand. The outlook is likely to improve in FY25 because a strong La-Nina will positively affect agriculture, leading to increased foodgrain production and strengthening the rural economy.

Moreover, sectors such as Metals, Power, Capital Goods, Realty, Auto, and Public Sector Enterprises have played a crucial role in driving the market to new heights. The metals sector, in particular, benefited from positive developments in China and a surge in copper demand for renewable energy projects despite supply constraints due to sanctions on Russia, a significant producer. Metal stocks have seen a 30% increase in the last two months. Infrastructure, capital goods, and the auto sector have also performed well, fueled by robust domestic demand driven by government spending and manufacturing.

Indian manufacturing firms, closely linked to the country’s GDP growth, have outperformed the broader market four times in the last two months. The GDP growth for FY24 is projected to close at 7.8%, significantly higher than the average forecast of 6.5% in January 2023. With a GDP growth forecast of 6 to 7% from FY25 to FY30, further upgrades are possible as manufacturing policy measures continue to strengthen.