China Throws Flimsy Lifeline to Europe’s Weak Commodity Stocks
(Bloomberg) -- There are already concerns that this week’s rally in European commodity stocks, spurred by Chinese stimulus measures, may not last.
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Mining stocks jumped the most since November 2022 after authorities in Beijing announced a coordinated package to boost the economy and tackle the crisis in China’s property sector. The question that’s surfaced among investors is whether this is all enough to change the outlook for shares in resources companies.
European miners are still heading for their deepest third-quarter slump since 2021, even after Tuesday’s 4.4% surge. For energy, there hasn’t been a worse quarter in four years. Much of that misery is down to the uncertain recovery in China, the number-one importer of commodities.
“The announcements will help with the relief as investor confidence prompts upwards, however the new stimulus is unlikely to significantly boost the economic growth in the mainland,” said Leonardo Pellandini, an equity strategist at Bank Julius Baer. “We don’t see as of yet a sustainable recovery for Chinese exposed miners and energy companies within Europe.”
Iron ore has been among the worst performing commodities this year, sliding more than 8% in the third quarter as China’s slowdown has hurt demand. At the same time, major low-cost miners in Australia and Brazil have been boosting supplies, driving the market into a surplus.
“The medium-term outlook for commodity stocks remains bleak,” said Marija Veitmane, senior multi-asset strategist at State Street Global Markets.
When it comes to oil, aside from worries over the flagging Chinese economy, the prospect of increased supplies from OPEC+ producers has dragged on prices, which are down by around 10% so far this quarter.
Energy and mining stocks are among the weakest performers in Europe’s Stoxx 600 this year and the gloom clouding the demand picture has fueled a discount they trade at relative to the broader market.
“Following strong underperformance this year energy and material stocks are relatively cheap,” Veitmane said. “However, institutional investors show little appetite for them.”
This week’s measures from China showed authorities are taking seriously warnings the country risks missing its growth target of around 5% this year. But doubts remain over how effective the steps will be in easing longer-term deflationary pressures and the woes across real estate.
“In general, I’m very skeptical,” Veitmane said. “It’s too little and too late from China.”
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