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Treasure Chest: Sell Miners In May?

Treasure Chest | May 02 2018

Citi analysts recommend buying mining stocks in any weakness.

-May typically weak for mining stocks
-Valuations compelling
-China data supportive

By Greg Peel

In seven of the past eight years, note Citi’s metals & mining stock analysts, miners (globally) have posted a negative May. By contrast, 14 of the last 21 Aprils have been positive. This April was a strong month for miners, suggesting to the analysts there might indeed be some give-back this May.

Citi has been recommending buying into mining stock weakness as the analysts believe valuations are compelling, while conceding risks are building for demand in the latter part of 2019. This suggests miners could fade in early 2019.

As always, much depends on China.

Last month the Chinese central bank decided to cut its reserve requirement ratio for some, but not all, banks. These are mostly large commercial banks, foreign banks and urban and rural banks which were subject to RRRs up to 17% and are the major entities holding medium term loans from the PBoC. The cut will equate to a liquidity injection of some RMB1,300bn.

Citi had expected one cut to RRRs this year but not so soon, given the last cut was only in January.

The announcement came on the heels of the release of China’s March quarter GDP growth number, which at 6.8% was in line with expectation. Citi’s economists believe China’s economy may have peaked in the quarter amid policy tightening and trade headwinds and will not rule out the possibility of another RRR cut later in the year.

Industrial activity slowed in the month of March but was impacted by both the timing of Chinese New Year and regulated industry shutdowns during the prolonged National People’s Congress, Citi notes. Fixed asset investment grew 7.5% in the March quarter, down from the 7.9% rate of January-February but ahead of 2017’s rate of 7.2%.

Real estate activities have remained healthy so far this year as Citi had expected. Outperformance in the month of March lifted the quarter’s real estate investment growth to 10.4% from 9.9% over January-February. Citi is to date forecasting 6% growth for the year.

Commercial land sales also rose 0.5% year on year in the March quarter, from a high base, suggesting developers' steady appetite for acquiring land.

All of which is supportive of commodity prices.

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