J.P. MORGAN: 6 reasons to buy mining stocks

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2015 has not been a good year for Australian mining stocks. The ASX 200 energy index is down 27% while materials have fallen just over 8%. In comparison, the broader ASX 200 is off by a far smaller 5.8%.

While many believe the outlook for commodity prices remains weak given tepid global demand, particularly from China, not everyone shares the view that the outlook for commodities, hence mining stocks, is bleak.

J.P Morgan’s global equity research team, Mislav Matejka, Emmanuel Cau and Prabhav Bhadani, are certainly of this view, upgrading mining and energy stocks to overweight and neutral weight respectively in a research note released overnight.

The trio offer six reasons to justify their stance, which are below.

  • Risk-reward is improving as the sector is by far the worst performer YTD, down almost 30% in absolute terms.
  • Iron ore price has picked up since July, now up 30%+ from lows. From current spot levels, JPM projections are for broadly range-bound commodity prices next year. EPS downgrades have already been severe, with the Mining EPS integer down 80% from highs. Unless commodity prices fall significantly further, downside is likely limited from here.
  • Bearishness on China is omnipresent these days, but we note some improving datapoints: Auto sales were up 12% mom for August; steel PMI is up from 37 at the lows to 45 currently; infrastructure orders appear to be bottoming out to meet annual budget plans; and property transactions are stabilizing.
  • The Fed event could act as a positive catalyst, offering clarity. A case of “travel and arrive”.
  • The sector is clearly doing self-help. Major Miners’ capex spend has halved over the past three years. Companies are working to improve their balance sheet health.
  • Mining valuations have improved, with P/B relative at its lowest since 2001.

The two charts below, supplied by J.P Morgan, shows the drop in mining sector capital expenditure along with the the decline in the price to book ratio for mining firms.

Aside from the upgrade to the mining and energy sectors, they maintain an overweight rating on Japanese and eurozone stocks and are underweight US markets.

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