Mine workers repair the teeth of a shovel excavator in the pit at Sishen open cast mine, operated by Kumba Iron Ore Ltd., an iron ore-producing unit of Anglo American Plc.Nadine Hutton/Bloomberg
A market-leading rally in Europe's commodity producers this year has yet to make the shares expensive. The reason? Earnings optimism.
Miners were the biggest gainers on the Stoxx Europe 600 index on Tuesday, poised for their highest level in 14 months, while trading near their lowest valuations relative to the broader benchmark since January. That's because stabilizing commodity prices have prompted analysts to temper their estimates for 2016 profit declines at the firms. Forecasters who saw a contraction of 51 per cent in April are now projecting a drop of only a third as much, followed by growth of 27 per cent next year.
Anglo American PLC and Antofagasta PLC rose at least 4.7 per cent, tracking a rally in metal prices on optimism the global economy is becoming more resilient. The Stoxx 600 basic resources index climbed 3.1 per cent in London on Tuesday, taking its annual advance to about 44 per cent. Receding concern about a slowdown in China, the biggest consumer of commodities, has helped boost the shares since a rout at the start of the year.
"Earnings expectations for miners had been cut back quite substantially and now they're rebounding from quite low levels," said Gunther Westen, who helps oversee about $28-billion as head of asset allocation and fund management at Meriten Investment Management GmbH in Dusseldorf, Germany. "There could be some more room for a rally in miners given the stabilization in commodity prices."
The Stoxx 600 mining gauge is closing in on its level of August, 2015, when China's devaluation of the yuan sent commodity shares tumbling to their worst annual drop since the global financial crisis. The index slid to its lowest level in more than a decade at the start of the year, before rebounding. Stocks including Anglo American PLC, Glencore PLC and ArcelorMittal have more than doubled in 2016, leading gains on the Stoxx 600.
The broader European equity benchmark slipped 0.3 per cent on Tuesday, as losses in health-care shares and lenders offset the rally in miners.