JPMorgan upgrades mining, energy; says Fed impact likely to be positive either way
JPMorgan Cazenove upgraded its stance on the European mining and energy sectors as it said that regardless of the actual decision, the impact of the Federal Reserve’s move on Thursday could end up being positive for financial markets.
If the Fed raises rates but also reassures markets that this will be a gradual process, it would be well received. If it delays the move, this could be interpreted as a sign that it’s aware of and is responding to market concerns, JPM said.
"Even though inaction might be seen as prolonging market anxiety, the key in our view is that investors get to know what the new Fed’s reaction function is,” said JPM, adding that one of the concerns investors have is over the lack of clarity from central banks.
JPM said it believes policymakers are still on the side of risky assets and will act supportively.
The bank, which has been cautious on commodity equities for a while, said it’s now advising investors to tactically add exposure. It upgraded mining stocks to ‘overweight’ and energy to ‘neutral’, funding the move by downgrading capital goods to ‘neutral’.
As far as mining is concerned, it said the risk/reward is improving as the sector is the worst performer year-to-date, down almost 30% in absolute terms. In addition, it pointed out that iron ore has picked up since July and is now 30% up from its lows.
It said that while investors are bearish on China, there have been some improving data points. Auto sales were up 12% month-on-month in August, while infrastructure orders appear to be bottoming out to meet annual budget plans and property transactions are stabilising, said the bank.
JPMorgan highlighted self-help in the sector, with major miners’ capex spending halved over the past three years. Finally, it said mining valuations have improved.
The bank reiterated its call from 1 September that recent market weakness is unlikely to be a start of a prolonged fall, but a correction which should be used to add exposure.
Regionally, it remains ‘overweight’ Japan and the Eurozone, and ‘underweight’ the US. It’s bullish on Eurozone recovery plays such as banks, construction materials, travel & leisure, media and retail.
JPM also finds global consumer plays, such as autos, attractive.