Trumped by fear, mining stocks look to rebound
13th September 2018
Resources Rising Stars
The big miners may be the new superstars of the dividend scene, but this has failed to translate through to any big appetite for their shares over recent months (reports The Australian Financial Review).
Indeed, the listed mining sector has been a weight around the stockmarket's neck: the S&P/ASX 300 metals and mining index is off 11 per cent so far this quarter, on Thomson Reuters numbers, against a broadly flat result for the ASX 300 overall.
This tracks the fall in Bloomberg's metals price index over the same period. It's clear, then, that equities are tracking commodity prices lower.
A quick jaunt around the ASX shows that since June 30 Rio Tinto shares are off 15 per cent, Fortescue is down 18 per cent, BHP has dropped 9 per cent and Whitehaven Coal 8.7 per cent. South32 is an outlier: it's pretty much flat over the period.
The aggressive trade rhetoric US President Donald Trump has aimed at China has surely been a major factor pushing miners' share prices lower.
This week investors have been holding their breaths as we await word on whether the Americans will apply tariffs on another US$200 billion of Chinese imports.
Markets are also worried that Trump is hellbent on ordering imposts on a further $US267 billion of goods – which would effectively slap an additional tax on every Chinese import into the US.
The Asian giant is a major source of demand for the world's raw materials, and worries of an escalating confrontation with the US have hurt industrial metals – such as copper – in particular.
Traders have used industrial metals, which can be bought and sold on exchanges, as a liquid proxy for trade war fears. That is, it's an easy way to express a view on the perceived rise and fall in the probability that Trump's trade rhetoric morphs into something real and damaging to global economic growth.
The fact that iron ore and coal prices, which are not traded on a minute-to-minute basis, have held up significantly better implies no actual collapse in demand for raw materials.
If metals and the miners who produce them have been victims of worsening market sentiment, rather than deteriorating fundamentals, is there a chance of a turnaround? London-based mining analyst Paul Gait of Alliance Bernstein reckons there is.
Gait thinks the recent breakthrough in talks around the North American Free Trade Agreement, at least with Mexico, is an early sign of an inflection point in sentiment around the sector.
The renewed threats around Chinese imports have knocked this optimism a touch, but Gait is optimistic that the upcoming US mid-term elections in November is another opportunity to reset the market's view on commodity prices and the miners.
"We are now at a point where we would buy the miners not just on valuation grounds (they have remained cheap throughout the course of 2018) but also on the basis of commodity price momentum," Gait wrote in a recent note to clients.
"We believe that we may be starting to see the beginning of a reversal of the 'risk-off' trade that has driven many metals below their long-term mean reverting fair value levels."
Of course it's devilishly difficult to pick the moment where market sentiment will turn, particularly when a figure as unusual and volatile as Donald Trump is driving the fear.
So far he has proved more determined than many expected on trade. But fundamentals, not fear, will hopefully win out in the end – and provide a much-needed boost to our big listed miners and their shareholders.
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