Michael Musica, Live Bloomberg Markets Reporter and Strategist
January and February are usually pretty good months for European mining stocks, as Chinese factories rush to replenish metal reserves. This year, its seasonal rise will depend on whether Beijing survives with stimulus..
The Stoxx 600 Basic Resources Index will enter 2023 with a modest rally, rebounding 13% from its October 23 low as it became clear that central bank interest rate hikes were coming to an end. Historical patterns over the past two decades indicate that these gains are likely to continue. January was a positive month for the miner 65% of the time, with an average profit of 1.3%. And February is even better with an average increase of 3%.
Despite these promising signs, Net 26% of European fund managers are underweight basic resources stocks, Bank of America’s December investor survey found that it was the most hated sector after chemicals. Their wariness likely stems from concerns about an economic downturn, as well as uncertainty about how much stimulus China will use to support growth in the world’s largest steel producer.
The prospect of lower U.S. interest rates, lower Treasury yields and a weaker dollar all tend to act as buy signals for mining stocks, said Christopher Lafemina, an analyst at Jefferies. He is positive about the sector over the next one to three months, with Anglo American, Alcoa and Teck Resources among the top candidates.
“The risk is that this Goldilocks scenario could be followed by a recession, in which case the short-term strength of these stocks would likely reverse.‘ warns Lafemina.
Many others are looking to the Chinese government. After all, China accounts for 25% to 60% of large-cap miners’ revenue, according to data compiled by Bloomberg.
Iron ore is particularly key. For Rio Tinto and BHP, the world’s biggest miners, it accounts for about 50% of their revenue. Steel materials hit an 18-month high this week amid speculation that President Xi Jinping will strengthen the country’s economy and the People’s Bank of China will cut interest rates. Capital Economics’ Caroline Bain said recent data flows such as imports and PMI surveys also point to resilience in commodity demand.
Expectations that China will deliver aid have Citi strategists overweight mining stocks. They are particularly bullish on Rio Tinto and South32, expect steel production to remain strong, and analysts have raised their expectations for iron ore prices. They believe this will support earnings momentum in related stocks through the first quarter and possibly the second quarter.
Morgan Stanley analysts led by Alain Gabriel expect shareholder returns from the mining sector to be more disparate this year, given uncertainty around Chinese policy, interest rates and a potential dollar reversal. There is. Highlighting the growing supply stress in the copper market, they are tactically bullish on producers such as Lundin and Antofagasta.
Finally, valuations could be a headwind for mining stocks. The recent recovery has brought the forward P/E ratio back to its long-term average at around 11 times, while the discount to the broader market has narrowed to 12%. The once-high dividend yield has waned, to around 4%, just above the Stoxx index’s 3.7%.
Posted by: Zerohedge.com
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