Soaring commodity costs now pose a significant threat to 31 organizations or 46% of the absolutely free-float weighted industry cap inside the benchmark Nifty 50 index, according to worldwide brokerage and analysis firm Bank of America Securities (BofA). The exposure to commodity threat is up by virtually 75% because June final year. The report adds that owing to the jump in costs markets could consolidate. “Discretionary, Materials, Staples, Energy, Industrials sectors, in that order, are most at risk,” BofA Global Research report added.

According to BofA analysis, 54% of the absolutely free-float weighted industry cap inside Nifty, represented by the services sectors which incorporate financials, IT, and telecom, have no exposure to commodities. 6% has restricted exposure, whilst the rest 40% industry cap has higher 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.”

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Inventories provide cushion for now

However, at present, stock markets have not noticed the spike play out owing to inventories. The report noted that inventories variety from 17-85 days, which are believed to have cushioned the effect of the rise in commodity costs. With customer durables and auto firms announcing value hikes in January, the cushion now may possibly have vanished. Further the identical is anticipated to quickly hit earnings development.

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“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 stated. The value of these commodities are up virtually 75% because final June.

Sectors to bet on

Nifty is sitting shy of 15,000, which is Bank of America’s year-finish target for the index. Along with commodity costs,  increasing bond yields &amp prospective localised lockdowns make BofA analysts think that the continuation of a broad-based industry rally is now unlikely. The worldwide brokerage prefers industrials, components, 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.

(The suggestions in this story are by the respective analysis and brokerage firms. TheSpuzz Online does not bear any duty for their investment guidance. Please seek advice from your investment advisor ahead of investing.)

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