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Potential bright spots for industrial stocks after Fed rate cut

With the expected recovery in demand, BIMB Securities anticipates a rebound in ASPs, leading to improved business prospects (Source: omholdingsltd.com)
Monday, January 22nd, 2024

The steel industry experienced turbulence during 2H23 as it was weighed down by an unfavourable supply-demand imbalance
THERE may be a rebound in metal prices in 2024 driven by an expected US Federal Reserve (Fed) policy rate normalisation and recovering demand, according to a local equity research house.
According to BIMB Securities Research in a note released last week, positive market sentiment is expected to arise from moderation in inflation conditions, the Fed’s interest rate cut and enduring supply-demand dynamics.

It noted that a mixed outlook underpinned its ‘Neutral’ call on the sector.
It has a ‘Buy’ call for Press Metal Aluminium Holdings Bhd, with a 52-week target price of RM5.43, Scientex Bhd (RM4.15), OMH Holdings Ltd (RM2.11) and Well-call Holdings Bhd (RM1.90). At the same time, it has a ‘Hold’ call for Hextar Global Bhd (72 sen) and Kumpulan Peransang Selangor (KPS) (77 sen), and a ‘Sell’ call for PMB Technology Bhd (RM1.11). It is a ‘Not-Rated’ for Ann Joo Resources Bhd.
Commenting on the sector, BIMB Securities said it observed a downward trend in the movement of metal prices specifically for aluminium, alloys and steels throughout the second half of 2023 (2H23).
“This decline can be attributed to a myriad of factors and influences that significantly impacted market conditions, and therefore affecting the business performance for metal companies under our coverage namely Press Metal, Ann Joo Resources, OM Holdings and PMB Technology,” it said.
It noted that ferrosilicon, manganese alloys and silicon metal prices showed double-digit declines by 15.3%, 14.2% and 10.9% year-on-year (YoY) respectively compared to 1H23, in tandem with a 15% decline in steel price.
“Note that the steel industry was experiencing turbulence during 2H23 as it was weighed down by an unfavourable supply-demand imbalance following the challenging global industry landscape and sluggish China’s steel sector.
“Nonetheless, aluminium experienced a marginal decline (-5% YoY) from 1H23. Although the aluminium price was affected by weak demand, the price was supported by tight inventory supply. All in, the metal industry was weighed down by weak sentiment following inflationary pressure with a knock-on impact on demand,” it said.But it sees a silver lining emerging with the Fed’s rate adjustment. “We foresee a rebound in metal prices in 2024, to be driven by anticipated adjustment in US’s policy rate and a subsequent recovery in demand. Our economist projects a 100-basis point cut in the US Fed policy rate in 2024 from the current range of 5.25%-5.5%.
“We anticipate a gradual improvement in market sentiment based on reduced inflationary pressure, diminished expectations of the Fed interest rate hike, and the long-term favourable supply and demand dynamics,” it said.
With the expected recovery in demand, BIMB Securities anticipated a rebound in average selling prices (ASPs), leading to improved business prospects, including enhanced production and potential business expansion.
“Aluminium demand is expected to be balanced against tight physical supply. The closure of smelters relying on fossil fuels, particularly coal, due to mounting environmental concerns, coupled with Western sanctions against Russian aluminium products, is poised to impose constraints on the supply chain, thereby maintaining strength in aluminium prices,” it said.
It added that ferroalloy prices should be lifted by the recovery in demand following the reversal of the US interest rate cycle. However, we beg to differ on the steel market.
Despite the reopening of economic activities in China, it said demand for steel products continues to be underwhelmed due to excessive production and sluggish property market.
Additionally, it noted that the implementation of construction and infrastructure projects in China, as well as domestic infrastructure, has not been as robust as initially expected.
“Despite recent stimulus efforts by the Chinese government, they have proven insufficient to bolster the property and infrastructure sectors in China, thereby prolonging existing debt-property issues. Additionally, positive impact stimulus packages are constrained by overcapacity challenges in steel production,” it said.

https://themalaysianreserve.com/202...ots-for-industrial-stocks-after-fed-rate-cut/