Wilson Asset Management

China’s pivot to economic stimulus and move to cut lending rates means iron ore prices and miners can record a strong second half of 2023, says Matthew Haupt, Wilson Asset Management’s portfolio manager.

On Tuesday, the People’s Bank of China cut its one-year prime lending rates for the first time in 10 months by 10 basis points from 3.65 per cent to 3.55 per cent and five-year prime lending rate by 10 basis points to 4.2 per cent.

The push to support consumers and industrial activity follows similar action last week, when the central bank cut short-maturity and one-year lending rates offered to commercial banks by 10 basis points.

“Beijing is lowering key interest rates to stimulate bank lending and is planning a round of stimulus aimed at the real estate sector, which makes up more than a quarter of the Chinese economy,” said Mr Haupt. “This sector has been suffering the after-effects of a crackdown on developer debt.”

In anticipation of a rebound in Chinese construction, Mr Haupt has been gradually increasing his exposure to the materials companies. As of May 31, he allocated 27.8 per cent of the $1.8 billion WAM Leaders Fund to the sector, with major stakes in iron ore powerhouses BHP Group, Rio Tinto, and Fortescue Metals.

In October, the fund allocated 20.1 per cent to the materials sector and had 24.2 per cent invested in February of this year.

On the same day that China cut rates, iron ore prices climbed to $US114.30 a tonne and have recovered around 6 per cent since June 6 when Goldman Sachs slashed price forecasts by 18 per cent to $US90 a tonne from $US110 for the second half of 2023.

The broker said weak demand from China would lead to a surplus of the steel-making ingredient and additionally cut its three-month price target to $US80 a tonne. Citi has also said this month that it didn’t expect the rally in iron ore prices would last, citing a lack of meaningful stimulus in China.

But Mr Haupt said he was more optimistic than the brokers and expected demand to grow for other metals such as copper and aluminium, alongside ceramics, tiles, paint pigments, and other building materials.

Miners over banks

“We don’t expect a huge pick-up in iron ore prices, but we expect a steady increase over the rest of the year,” he said. “The back half of the year will look pretty good.

“In a world where there are not many clear trades, this one looks good to us. The stimulus leaves it well positioned for growth just as the rest of the world heads into a slowdown under the burden of rising interest rates.”

In addition, the potential for big dividends and share buybacks make the iron ore mining giants an attractive alternative to Australian banks that “will be under a bit of pressure” as rising rates threaten an uptick in bad debts and housing slowdown, Mr Haupt said.

Morningstar forecasts that BHP will pay a final dividend of $US1.10 per share to take total financial 2023 cash returns to $US2 per share on an FX-adjusted forward yield of 6.2 per cent plus franking credits.

Fortescue, meanwhile, is tipped to pay a final dividend of US43¢ per share to take its full-year cash payout to $US1.18 per share on an FX-adjusted forward yield of 7.8 per cent, on Morningstar’s numbers.

Shares in BHP rallied 1.5 per cent on the rate cut news and have advanced in seven of the past 10 sessions. The shares were down 1 per cent on Wednesday amid some profit taking in the sector. Fortescue shares were also lower, but have surged about 17 per cent since the start of the month

In Hong Kong, listed property developers Country Garden and China Vanke fell 5.7 per cent and 1.1 per cent on Tuesday to reflect some disappointment that Beijing was not moving more aggressively to cut rates as China’s property sector shows some signs of stress.