Recent data on China's rail freight traffic suggests that official numbers showing a Chinese economic recovery might not have been fictional after all. That's an optimistic sign for investors in Canadian mining and resource stocks.
When we last checked in on China's rail freight activity, the news was terrifying. The sharp decline in freight traffic indicated that Canadian stocks, particularly resources, were significantly overvalued relative to Chinese economic activity. More recent indications, however, suggest that China's economy is recovering, and that as a result, domestic stocks may be poised for a bounce.
The chart at left shows that while year-over-year rail activity remains in negative territory, October showed a dramatic month-over-month improvement of 5.8 per cent. The healthier data corresponds nicely to better year-over-year performance for the S&P/TSX Diversified Mining Index.
Along with electricity production, rail freight traffic is widely considered the most reliable of indicators of Chinese economic activity. The stronger recent reports are important on their own and also help alleviate the skepticism with which many economists viewed recent government economic reports.
Many Canadian miners do not sell metals directly to Chinese companies, but the level of Chinese construction and manufacturing activity, as the primary source of all new demand for resources, does determine the commodity prices at which all miners sell their products, regardless of destination.
Optimism surrounding a rebound in the Chinese economy is clearly building and by extension, also in the beleaguered Canadian mining sector.
Scott Barlow