Critical week ahead for mining companies

Equities 5 minutes to read

Peter Garnry

Head of Equity Strategy

Summary:  The news flow is broadly mixed on the coronavirus with the potential tail-risk still being large but regardless global equities are close to all-time highs buying the narrative of strong monetary and fiscal impulses from the world's largest economies offsetting the weakness from the coronavirus. Our view is that the equity market has lost its signal value on the economy and thus investors should look to commodities and the equity sectors of transportation and mining. For this reason this week is interesting with several large mining companies reporting earnings.


The alarm bells are ringing further and louder everyday from market participants that the market is becoming insane given the price action despite worrying comments from experts on the coronavirus which could infect 40-70% of world population in a worse-case global pandemic case. Meanwhile equities are bid as the narrative of dual stimulus from monetary and fiscal sources will offset any slowdown and supply chain disruption.

As we have said multiple times we put less weight on equities these days as they are clearly driven by the technology sector which is filled with quasi monopolies reflecting earnings power that is not reflecting the overall economy. The concentration risk is also alarmingly high in the S&P 500 with the 10 largest stocks now representing 24% of the overall index.

This means that equities have lost its signal value in relation to the fallout from the coronavirus and thus we cannot emphasize enough to watch commodities such as crude oil, iron ore and copper for real insight into the demand picture in China. Brent crude was bouncing back the entire last week but the momentum seems to have stopped for now but overall the price level reflects low demand and in theory we would expect equities to reflect this view but global equities are basically sitting at all-time highs. However, global logistics and transportation companies have been suffering recently although not sending stress signals.

17_PG_1
Source: Saxo Group

This week is a critical week for mining companies with major miners such as BHP Group, Glencore, Anglo American and Vale reporting earnings. These companies are together with transportation companies the closest to the epicenter of the coronavirus as China is the world’s largest consumer of commodities. Global mining companies have been lagging the global equity market over the past five years and they also had a larger drawdown during the worst week of the coronavirus in terms of sentiment. We will be closely watching the outlook in these earnings releases and comments during the conference calls. Like the energy sector we have a negative long-term view on the mining sector as the return on capital is lower than the cost of capital and in the short-term the coronavirus will only worsen the demand picture.

17_PG_2
Source: Bloomberg

Another important earnings this week is HSBC reporting tomorrow as the company has high exposure to Hong Kong and Asia in general. The key focus will be on the conference call with analysts likely asking question about loan quality and demand given the coronavirus outbreak in China but also the almost complete collapse in visitors to Hong Kong. Tomorrow’s earnings from Walmart are also interesting for two reasons; 1) their e-commerce efforts have ramped up and is beginning to compete on par with Amazon which is beginning to change the landscape for Amazon for decades have dominated US e-commerce market, 2) Walmart is still a good barometer on retail spending so Walmart earnings and outlook give clues to consumer spending which is important as the US economy is a consumer-driven economy.

17_PG_3
Source: Saxo Group

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

This website can be accessed worldwide however the information on the website is related to Saxo Bank A/S and is not specific to any entity of Saxo Bank Group. All clients will directly engage with Saxo Bank A/S and all client agreements will be entered into with Saxo Bank A/S and thus governed by Danish Law.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.