Deutsche Bank thinks it’s time to get back into mining stocks.
Markets have been surprised by some slightly better-than-expected data out of China over recent weeks, and Deutsche analysts believe “the five-year slowdown seems done”.
The bank’s Australian equity strategy team of Tim Baker and Joseph Kim has upgraded mining exposure from underweight to overweight in their model portfolio. Banks get bumped down from overweight to neutral.
“The [mining] sector still looks to be climbing off the bottom,” Baker and Kim wrote in a note to clients this week. “Analyst sentiment to the large miners remains quite poor. And relative performance is still well below trend. Our sense is that investors are underweight on balance (the median manager has underperformed this year, at the same time miners have outperformed).”
This week, China’s economic data on industrial output, retail sales and fixed asset investment for August beat across the board. There was also a slight expansion of the industrial sector last month, when the market had been expecting a further contraction. While the slowing in the growth rate of the world’s second-largest economy has been one of the major adjustments to the global demand outlook over the recent years, there are some signs that Chinese GDP growth may now be stabilising at between 6.5% and 7%.
Deutsche uses a composite index which averages data from 28 sources including PMIs, inflation data, imports, industrial production, production levels of steel and electricity, freight volumes, and property sales. This chart tells the story. (We’ve added the markings for emphasis.)
“The Chinese data flow looks reasonable,” Baker and Kim wrote. “Our composite macro indicator (which averages 28 series) suggests the five-year slowdown is over. Two indicators stand out to us – electricity production growth is trending higher, and producer price deflation is largely over. On the back of better-than-expected August data, our economists see upside risk to second-half growth.”
One of the other surprises of this year so far has been the strength in some commodity prices like iron ore. As a result, there’s a good chance that mining companies are about to increase their profit guidance, and in a big way. From the note, emphasis added:
It’s hard to bet against the large earnings upgrades on the way. The sector has continued to surprise on cost-out, and now with firmer commodity pricing the impact on the bottom line is sizeable. A mark-to-market implies more than a doubling of 12m forward earnings, and figure 9 suggests that is far from priced. Spot pricing may well not hold, but miners are currently benefiting from that earnings stream regardless, and upgrades of some size are coming.
And here’s that chart:
Deustche Bank added BHP spin-off South32 to its model portfolio.
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