By Sarah Turner
SYDNEY (MarketWatch) -- The Australian mining sector may feel
the pinch from China's surprise decision to hike rates for some
months to come, and at least one broker advises a cautious stance
on the sector for the short term.
China lifted interest rates this week for the first time in
several years and, while investors broadly welcome China's attempts
to cool its red-hot economy and introduce sustainable growth,
doubts also tend to emerge about whether growth will plummet.
A drop in Chinese growth would curb its demand for metals, and
Merrill Lynch strategists wrote in a recent note that Australian
resource equities underperformed the broader market by around 20%
over eight months the last time China started on a rate tightening
cycle, in 2006.
The strategists said that mining stocks may start to
underperform again after China's most recent hike, with two factors
crucial to mining sector performance over the coming weeks.
The first is China's interest rates intentions. "The hike was a
surprise and occurred immediately after Communist Party leaders met
to consider the next five-year plan. It might mean the push toward
structural reform at the expense of growth is accelerating," they
said.
China's rate hike is just the latest step in tightening policy,
the analysts noted, as it follows an increase in banks' reserve
requirement ratio and a variety of measures to cool the property
market.
The other major influence on mining-sector share prices over the
short-term will be whether quantitative easing is introduced in the
U.S., according to the Merrill Lynch analysts.
Expectation in recent weeks that the Federal Reserve will start
a new bond-buying program to kick-start growth in the U.S. economy
has weighed on the greenback and consequently, boosted interest in
dollar-denominated commodities.
That's helped the mining sector to rally, with BHP Billiton Ltd.
(BHP) up 6.8% over the past three months. Rio Tinto Ltd. (RIO) up
20.4% over the same period, Fortescue Metals Group Ltd. (FSUMY) up
54.9% and Newcrest Mining Ltd. (NCMGF) up 19.5%.
The Merrill Lynch analysts said that markets are expecting
quantitative easing to reverse a slide in Western demand.
"This sentiment will not be sustained unless QE is shown to be
having meaningful impact on growth and sooner rather than later,"
they said.
The next few weeks, with the Federal Reserve set to meet early
in November and Chinese policy intentions to become clearer, "will
be crucial," the Merrill Lynch analysts said.
In the meantime, they recommend that investors take some profit
from some of the companies that have rallied hard since August.
Miners in the top-10 constituents of this group include Fortescue,
Rio Tinto and Newcrest, they said.
The sector diverged in performance terms on Friday, with BHP
Billiton up 0.4%, Rio Tinto down 0.3%, Newcrest Mining down 0.8%
and Fortescue Metals up 2.4%.
Overall, the Australian S&P/ASX index edged up 0.2%, Japan's
Nikkei Average advanced 0.5%, Korea's Kospi rose 1%, the Singapore
Strait Times index edged down 0.1%, and China's Shanghai Composite
index lost 0.2%.