Commodity Correction: Why Experts See a Buying Opportunity in Defence and Banking

The recent volatility in commodity prices and defence stocks has left many investors cautious, but market experts suggest this is a strategic entry point rather than a reason to exit. According to Dharmesh Kant of Cholamandalam Securities, the underlying demand fundamentals for key sectors remain exceptionally strong despite the temporary market pullback.

Commodity Stocks: A Strategic Accumulation Phase

While copper, aluminium, crude oil, and silver have recently witnessed sharp declines, Kant argues that these corrections are a standard part of long-term commodity cycles. He believes the upcycle is far from over, predicting at least one to one-and-a-half years of positive momentum remaining.

The demand for industrial metals like aluminium, copper, and zinc is expected to strengthen alongside global economic activity. Notably, silver is positioned for significant structural growth due to its critical role in electric vehicles (EVs), electronics, and solar panels. Kant projects that silver demand could compound at a CAGR of 15–17% moving forward. For investors looking to capitalize on this, quality names such as Hindalco, Vedanta, and JSW Steel are recommended for accumulation.

Defence and Banking: The Long-Term Winners

Despite recent selling pressure in the defence sector, Kant maintains that the fundamentals remain intact, with the volatility being driven primarily by short-term trading positions and news flow. For a three-year investment horizon, he identifies Bharat Electronics (BEL), Hindustan Aeronautics (HAL), and Mazagon Dock Shipbuilders as robust long-term plays. He specifically highlighted the potential of the P-75 submarine project to significantly expand Mazagon Dock’s order book.

In the financial space, banking and financial services are preferred over the automobile and auto-ancillary sectors. While lower crude oil prices will eventually boost corporate margins, Kant suggests that banking stands as the strongest indirect beneficiary of improving macroeconomic conditions and resilient domestic credit growth, which is expected to hover around 17–18%.

Sectoral Cautions: AI Themes and Auto Ancillaries

While being bullish on core sectors, Kant advised caution regarding certain niche themes. He expressed skepticism toward certain AI-themed stocks, such as Sterlite Technologies, noting a lack of intellectual property (IP) or a sustainable "moat" in their business model.

Furthermore, he suggested staying away from auto and auto component manufacturers for the immediate future. He noted that due to a high base effect in the second half of the year, these companies may struggle to deliver the 20–25% profitability growth that investors expect. Similarly, while paint companies have recovered from recent lows, high valuations and intense competition may limit their further upside.

Key Takeaways

• Commodity Accumulation: View the current correction in metals as a buying opportunity, with silver poised for 15–17% CAGR growth driven by the green energy transition.
• Defence Outlook: Maintain a long-term perspective on HAL, BEL, and Mazagon Dock, as recent price drops are driven by trading rather than fundamental shifts.
• Sectoral Preference: Prioritize banking and financial services over auto components to benefit from robust credit growth and improved macroeconomic stability.