Resource stocks back in vogue on China hopes [IMG] Jessica Sier...

Resource stocks back in vogue on China hopes

• Jessica Sier
  

Just when you thought they'd been written off, resource stocks come back into vogue with force and fund managers are rotating back into the sector following hints China is on the growth-path again.

Worried investors fled mining and energy stocks earlier in the year, as rumours swirled China would fail to keep its growth targets and demand concerns weighed heavily on commodity prices.


Money managers are looking towards mining stocks again.
But Chinese authorities are beginning to signal that fiscal expansion and growth are again back on the cards, and following that, resources stocks are finding support from both retail and institutional investors.

"We don't necessarily think we're at the start of a huge bull market," says Julian Babarczy, head of Australian equities at Regal Funds Management. "But we do feel like the bottom of the cycle has been reached and that we're back in a more traditional commodity cycle where we'll have volatility based on short-term supply and demand signals."

Earlier in the year, investors were sceptical China would manage to keep growing and sluggish growth data placed a heavy pressure on commodity prices. As iron ore fell below $US40 a tonne in January and oil plumbed 12-year lows, resource companies were forced to drastically streamline, downsize and cut costs at all their operations.

But since then, global commodity prices have lifted 25 per cent and according to HSBC, retrenchment of supply and a pullback in investment are gradually rebalancing some key commodity markets


"After the heady days of the super-cycle upswing, when rising prices supported profitability almost irrespective of costs, the past couple of years have seen a clear focus on cost reduction," writes Paul Bloxham, chief economist at HSBC Australia, who expects further supply consolidation and solid demand growth to drive modest prices rises in coming quarters.

Greater demand expected
Last week, the China State Council signalled the "expansion of aggregate demand" and that they would be "accelerating key infrastructure projects". Combine this with "encouraging private companies to raise investment" and investors feel a heartier appetite for commodities and indeed mining stocks is just around the corner.

"The data in China has been much stronger than people expected and that should be a precursor as a demand for commodities," says Mr Babarczy. "The only caveat is that demand is stimulus lead, and we don't know whether that's sustainable or not. But there is a greater tendency for people to buy these stocks at the moment."

Credit Suisse, which last week added BHP Billiton back into its equity portfolios and also holds South32 and Syrah Resources, sees solid earnings per share momentum as the tip of the new cycle.

"Australia's commodity producers continue to provide a glint of growth in a market where it is elusive," writes Hasan Tevfik, head of Credit Suisse's equity investment strategy team, in a note to clients. "Earnings momentum for our commodity companies has clearly turned, while it remains stagnant elsewhere."

While iron ore and coking coal have provided support for the likes of Fortescue Metals, which has rocketed up 164 per cent so far this year, and Whitehaven Coal charging more than 250 per cent higher this year, more niche commodities are also finding support in this appreciative environment.

Graphite producer Syrah Resources is a current market darling, trading higher over the year and lithium, the main component in batteries, is still enjoying its time in the sun with shares in Orocobre and Galaxy Resources up substantially.

But now that Australia's largest export has settled around the $US50-60 a tonne mark, and both HSBC and Regal see it staying around that price for a while, oil remains the most mysterious commodity, with its constant hunt to find equilibrium.