For Miners' Seasonal Rally, China Is The Wild Card

By Michael Msika, Bloomberg markets live reporter and strategist

January and February are usually pretty good months for Europe’s mining stocks, as factories in China rush to replenish their metals reserves. This year, that seasonal lift will hinge on Beijing coming through with stimulus.  

The Stoxx 600 Basic Resources index is coming into 2023 after a decent run of gains, bouncing 13% from its October 23 trough as it became clear central banks are done hiking interest rates. Historical patterns from the past two decades indicate those gains could continue — January has been a positive month for miners 65% of the time, with an average 1.3% gain. And February, with a 3% average advance, is even better.

Despite those promising signs, a net 26% of European fund managers were underweight basic resources shares, Bank of America’s investor survey found in December, the most unloved sector after chemicals. Their wariness likely stems from fears of an economic downturn, as well as uncertainty on how much stimulus China will deploy to support growth in the world’s largest steelmaking nation.

Jefferies analyst Christopher LaFemina notes that US rate-cut prospects, falling Treasury yields and a weaker dollar all tend to act as buy signals for mining shares. He is positive on the sector over the one-three month horizon, with Anglo American, Alcoa and Teck Resources his top picks.

“The risk is that this Goldilocks scenario might be followed by a recession. If that happens, then the near-term strength in these shares would likely reverse,” LaFemina warns.

Many others are banking on Beijing. After all, China accounts for between 25% and 60% of large cap miners’ revenue, according to data compiled by Bloomberg.

Iron ore, particularly, will be key. At Rio Tinto and BHP — among the world’s biggest miners —  it comprises about 50% of revenue. The steelmaking material raced to fresh 18-month highs this week, after President Xi Jinping pledged to strengthen his country’s economy and amid speculation China’s central bank will cut rates. Recent dataflow, including imports and PMI surveys, also point to resilient commodities demand, says Caroline Bain at Capital Economics.

Expectation that China will come through with aid is keeping Citi strategists overweight mining stocks. They are particularly bullish on Rio Tinto and South32, betting steel production will remain strong, leading analysts to raise iron ore price estimates. That in turn should underpin earnings momentum for related equities through the first quarter and possibly the second one, they reckon. 

Morgan Stanley analysts led by Alain Gabriel expect a wider dispersion in shareholder returns from the mining sector this year, given uncertainty around Chinese policy, interest rates and the potential reversal in the dollar. Highlighting rising supply stresses in copper markets, they are tactically bullish on producers such as Lundin and Antofagasta.

Finally, valuation could prove a headwind for mining stocks. Their recent bounce has taken forward P/E ratios to about 11, back to long-term averages, while the discount to the broader market has narrowed to 12%. Once-stellar dividend yields too have faded — at about 4%, they offer only a bit more than the Stoxx index’s 3.7%.