Mining shares and Asian equities part ways - The Australian Financial Review

Investors have flooded into mining stocks in recent weeks. Brendon Thorne/Bloomberg

Mining and Asian equities generally track in tandem, thanks to their reliance on China, however since the United States election these two asset classes have diverged considerably, and Deutsche Bank sees some buying opportunities. 

Buoyed by resurgent commodity prices and the prospect of an onslaught of fiscal spending in the United States, investors have flooded into mining stocks in recent weeks. 

However, Deutsche Bank sees some weakness on the horizon, but rather than prepare for a drastic re-rating of the market darlings which would see miners underperform by 25 per cent, the bank suggests buying on the dip. 

"We expect miners to dip in coming months, but would take that as opportunity to add exposure," said Tim Baker, equity strategist, and Joseph Kim, research associate, at Deutsche Bank.

Asia v developed markets and Australian miners v S&P/ASX 200 Index

The rapidly strengthening US dollar is one catalyst for softness in mining stocks given their correlation to Asian equities, said the analysts, who expect the world's reserve currency to appreciate a further 5 per cent. 

"Historically a stronger US dollar has been a headwind for Asian equities," they said.

Concerns around what kind of trade relationship will eventuate between the United States and China are also playing on investors' minds, as President-elect Donald Trump touted a 45 per cent tariff on Chinese exports trying to make their way into American homes and a wind-back of trade agreements. Given the dependence of Asia on global trade, it's unsurprising share markets are under pressure. 

Add to this the prospect of a devaluation in the renminbi and the fact that mining stocks are looking overbought, with a six month pace of outperformance holding close to record highs, both mining stocks and Asian equities may be in for a breather. 

The turnaround

But Deutsche Bank argues the broader story is more compelling for mining stocks and Asian equities. Mining stocks in particular have more valuation support and are still climbing off a severe bottom, with share prices still 30 per cent below the long run trend. 

Add to this the strong cash flows and severe belt tightening that has taken place in recent years following the end of the commodity boom, and miners are looking attractive over the long term. 

And while Asian equities are having a rough trot at the moment, the bank suggests the greenback might not have too much further to run, having already surged 25 per cent since 2014. 

"And with that rally hurting US growth, the appetite for more might not be large," said the analysts. 

While trade is still the headline worry, the analysts point to firmer earnings from Asian companies as they become more realistic about guidance. 

"Earnings revision momentum has improved across the region, in part due to more realistic forecasts," said the analysts. "And earnings revisions tend to lead export growth."

Asian company valuations also look relatively cheap, with the price-to-earnings ratio 5 per cent cheaper than the average, and the price-to-book valuation 10 per cent cheaper. Deutsche Bank points out that it is valuation re-rates that generally drive out performance, rather than superior earnings and given the more positive outlook for global growth, value could be unlocked. 

That and solid data flow out of China, investors may be in for a period of bargain grabbing.