China stimulus could spark more rises for rebounding resources
Resources stocks have surged 17 per cent in a month but are still in negative territory for 2024. Experts examine the outlook.
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Aussie stocks reached record highs this year without any help from our massive resources sector, but economic moves in China could change that dramatically.
Resources companies represent almost one quarter of the S&P/ASX 200 index and last week surged 9 per cent after several Chinese government stimulus measures were announced.
The S&P/ASX 200 Resources Index rose another 1.7 per cent on Monday, but the depths of its falls this year mean it remains 9.5 per cent below where it was in early January. Market analysts and strategists say the new Chinese stimulus could fire up a fresh round of resources company gains, but they may be muted until after the US presidential election.
Tribeca Investment Partners portfolio manager Jun Bei Liu said resources had underperformed significantly in 2024, “particularly relative to the other large sector, which is banks”.
“With CBA up 30 per cent and BHP down 30 per cent it’s quite a big contrast, and quite rare,” she said. Ms Liu said investors had been holding onto the banks but holding very few resources stocks, and now were scrambling to cover their positions.
“Chinese growth has been very, very disappointing so far this year, and China’s government has finally stepped up with a real intention of loosening financial conditions for consumers and corporates,” she said.
“They decided to drop some helicopter money for low-income consumers, and we expect that money to be spent.”
The Chinese government’s list of stimulus measures included interest rate cuts, reducing minimum down-payments on second homes, and loosening bank reserve requirements.
In the past week BHP shares have climbed 15.4 per cent, Rio Tinto has risen 15.8 per cent, and Fortescue shares have increased 16.9 per cent.
Moomoo chief commercial officer and market strategist Michael McCarthy said resources “certainly seems to be the next leg up that could drive us to more all-time highs”. “Concerns for the global growth outlook remain, but the sheer number of measures China took to stimulate their economy brought some optimism back,” he said. “It turned around the outlook for resources stocks generally.”
Mr McCarthy noted fresh rotation between Australia’s two biggest sectors, banking and resources, and money was flowing into miners because investors had underweight positions in them.
“Australia’s share market is often referred to as homes and holes – banks and resources stocks,” he said.
Chinese stimulus has a history of spurring Aussie stocks higher.
Mr McCarthy said China’s financial measures in 2009 during the global financial crisis were a huge driver of global growth, boosted the outlook for commodities and “fed into better performance for Australian shares”.
China remained very important to Australia, he said.
“Nobody is getting too carried away with the outlook for resources, but they’re certainly trading nearer to lows than highs, and that gives some comfort that the risk for commodities is to the upside rather than the downside.”
Share markets overall were climbing a wall of worry, Mr McCarthy said.
“I think we are likely to head higher, but it’s going to be hard yards – the reality is the air is pretty thin up here,” he said.
AMP head of investment strategy Shane Oliver said China moving to a “whatever it takes” policy to stimulate its economy was positive for shares over the next six-to-12 months.
“We are also now coming into a positive time of the year for shares from a seasonal perspective after they performed surprisingly well through the normally weak months of August and September,” he said.
Dr Oliver said the Chinese stimulus, combined with easing inflation pressures and central banks cutting interest rates, should help deliver reasonable returns in the year ahead. However, returns were likely to be more constrained than 2023-24 because of recession risks, high valuations and geopolitical issues – particularly around November’s US election, he said.
Tribeca’s Ms Liu said China had “stimulated massively” during the GFC and it drove commodity prices and share markets higher back then.
Its new stimulus could underpin further growth in the coming months, she said, but first markets would have to digest the result of the upcoming US election amid talk of fresh tariffs on China.
“Tactically it’s hard for it to rally too far given the US election uncertainty – I think it will be capped for the time being.
“Once we have certainty over the election, then here we go.”
Ms Liu said China’s stimulus combined with US interest rate cuts could signify the start of a bull market.
She said the best way for investors to buy into the China recovery story was through resources companies and also consumer stocks with significant Chinese sales, such as Treasury Wine Estates and The a2 Milk Company.
“Seventy per cent of iron ore is consumed by China … once that picks up, the direct beneficiaries are going to be Fortescue, partly BHP and partly Rio Tinto.
“I think the larger miners are the easy way to play it.”
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