Dr Copper is at it again, signalling upside for mining stocks according to some, despite being largely overlooked by investors and even treated with fear by others who are stewing over the implications of the trade spat between the United States and China. The Basic Resources sector in Europe trades lower than its starting point for 2018 and well off the highs registered in both May and June. Red ink in European equities is nothing new, as many sectors and stock market indices remain negative year to date, as investors focus on the divergence trade with the US outperforming everything else. But perhaps the mood music is changing for mining stocks.
There is a strong correlation between copper prices and mining stocks according to Sebastian Raedler, Head of European Equity Strategy at Deutsche Bank. Raedler expects copper prices to rally from here which is behind the 10 percent increase he expects for the mining sector by early December, and the upside could be amplified to a 16-percent rally if adjusted for currency expectations. Deutsche Bank anticipates Sterling will remain flat versus the Dollar in coming months Further number crunching by Raedler indicates the 12-month forward P/E of European miners is at a 25 percent discount to the broader market, highlighting deep value in the sector.
Value or bear trap remains the question as many fear a trade war will stop European miners and other cyclical stocks in their tracks.
There are two opposing forces, the concern about trade and what is happening to the cyclical environment said Willem De Vijlder, Group Chief Economist, BNP Paribas on CNBC recently. But he warned not to ignore the impact of China stimulus.
“China has made a shift in its policy stance which I guess is the reason why metal prices have jumped. As soon as there is some silence on the airwaves around trade then there could be an uplift coming on the view that the cycle is not bad and the China stimulus is there,” said De Vijlder.
Others think buying mining stocks is premature and remain on the sidelines. Talib Sheikh, Head of Strategy, Multi-Asset, Jupiter AM has historically had mining stocks on the radar because of free cash flows but warned now is not the time to scooping up these assets.
“The continued noise around trade wars, China versus the US is holding investors back. It’s not entirely clear how that pans out – the idea that were going to see a resolution in October or November looks unlikely, so a protracted battle means again as we look into 2019 – the growth trajectory looks uncertain, so that growth would need to be upgraded more meaningfully to get involved”, said Sheikh on CNBC.
So are mining stocks at this point only for the brave? Absolutely.
Karen Tso is an anchor on Squawk Box Europe, CNBC and you can follow her on Twitter @cnbckaren.
