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By Samuel Indyk
LONDON (Reuters) - Investors are finally seeing potential in European mining shares, as China's step-by-step economic stimulus is steadily laying the foundations for a recovery of the unloved sector.
The STOXX Europe 600 mining index has fallen 15% this year, making it the worst performing sector in the region by some margin, with second-placed real estate down 4.5% and the top-performing retail index up 27%.
The metals and mining sector is typically used as a proxy for equity investors in Europe to gain exposure to China, given it is the world's largest commodities consumer, and it has sunk along with China's growth expectations.
The world's second-largest economy has been struggling after a brief post-COVID surge, dragged down by huge debt due to decades of infrastructure investment and a property downturn. Analysts forecast the economy will grow by just 5% this year, the slowest rate, outside of COVID years, since 1990.
But Beijing in recent weeks has taken targeted steps towards supporting key pockets of its economy, lifting the mining sector off its 31-month lows. In the last month, the mining index has risen nearly 10% compared with a gain of just 2.5% for the wider STOXX 600.
"China is building a wall of stimulus, but they're doing it brick by brick," said Nathan Sweeney, chief investment officer of multiasset at Marlborough Investment Management.
"At some point people will realise they have built the wall, but it just hasn't come all at once."
In the last three months, China has relaxed rules around home purchases and borrowing, and cut key interest rates. There are also new tax relief measures for small businesses and private investment in some infrastructure sectors, for example.
Sweeney says this wide range of measures could be a catalyst for an upturn in the metals and mining sector.
The STOXX basic resources index trades at over a 20% discount to the STOXX 600. Miners trade at a 12-month forward price-to-earnings ratio of 9.8, compared to 12.3 for the market, according to LSEG Datastream.
Shares in some of the industry heavyweights have taken a battering this year. Glencore and Boliden have dropped by more than 20%, while Anglo American has lost 30%. The pan-European STOXX 600 benchmark meanwhile, is up 7.5%.
Copper and iron ore have fared better. Three-month copper on the London Metal Exchange is flat for the year at $8,380 a tonne, while front-month Singapore iron ore futures are up nearly 9%.
Considering China's heft in the commodities world - Morningstar estimates it accounts for over 50% of refined copper demand and about 70% of the seaborne iron ore trade - some of that resilience should eventually seep into mining stocks, analysts said.