Doctor Copper is at it again, signaling upside for mining stocks, according to some analysts. This, despite it being largely overlooked by investors, and even feared by others stewing over the implications of the trade spat between the U.S. and China.
The Basic Resources sector in Europe is trading lower than its starting point for 2018 and is well off the highs registered in May and June. Red ink in European equities is nothing new — many sectors and stock market indices remain negative year-to-date, as investors focus on the divergence trade with the U.S. outperforming everything else.
But, perhaps the mood music is changing for mining stocks.
There is a strong correlation between copper prices and mining stocks, according to Sebastian Raedler, head of European equity strategy at Deutsche Bank. Raedler expects copper prices to rally from here and for there to be a 10 percent increase for the mining sector by early December. The upside could be amplified to a 16-percent rally if adjusted for currency expectations, he said.
Deutsche Bank anticipates sterling will remain flat versus the dollar in coming months. Further number crunching by Raedler indicates the 12-month forward price-to-earnings ratio of European miners is at a 25 percent discount to the broader market, highlighting deep value in the sector.
Value or bear trap remains the question as many fear a trade war will stop European miners and other cyclical stocks in their tracks.
There are two opposing forces — the concern about trade and what is happening to the cyclical environment, Willem De Vijlder, group chief economist at BNP Paribas told CNBC recently. But he warned not to ignore the impact of China stimulus.
"China has made a shift in its policy stance, which I guess is the reason why metal prices have jumped. As soon as there is some silence on the airwaves around trade, then there could be an uplift coming on the view that the cycle is not bad and the China stimulus is there," he said.
Others think buying mining stocks is premature and remain on the sidelines. Talib Sheikh, head of strategy, multi-asset at Jupiter Asset Management, has historically had mining stocks on the radar because of free cash flows, but warned that now is not the time to scoop up these assets.
"The continued noise around trade wars, China versus the U.S., is holding investors back. It's not entirely clear how that pans out — the idea that we're going to see a resolution in October or November looks unlikely, so a protracted battle means again as we look into 2019… the growth trajectory looks uncertain, so that growth would need to be upgraded more meaningfully to get involved," Sheikh told CNBC.
So are mining stocks at this point only for the brave? Absolutely.
Karen Tso is an anchor on Squawk Box Europe, CNBC and you can follow her on Twitter @cnbckaren.
