Energy and mining stocks
Barclays analysts believe the energy and mining industries transact cheaper than the larger market and have selected European inventories for sale in these categories.
The bank is overly bullish on both sectors. “They continue to be the two cheapest sectors, with strong EPS [earnings per share] momentum, and we are seeing additional news on excess capital return with Q2 results,” the analysts wrote in a research note released last week.
According to the analysts, the energy sector is at its “lowest ever” valuation, but the low price is “unsustainable — it is simply too cheap given the strong fundamentals,” they wrote.
“Demand appears to remain strong given the high level of activity and reopening expected during the summer months,” analysts said.
The transition to greener fuels, or the so-called energy transition, is a “long and expensive task,” according to Barclays analysts, but the costs are now factored into company forecasts. According to the analysts, there is “some evidence that investors are discriminating within the sector – rewarding ‘better’ ESG stocks while punishing others.” Environmental, social, and governance (ESG) factors are factors that investors consider.
Barclays created several stock lists, including a “Value Basket” that its analysts consider to be “very cheap, good current EPS momentum, key beneficiary of reopening.” The analysts believe their “Momentum Basket” is undervalued and overvalued.
Both baskets contain the Spanish oil company Repsol and the Austrian firm OMV, with the momentum basket also containing the French-American firm TechnipFMC. Shell is part of Barclays’ value basket.
According to Barclays, the bank is overweight mining due to its “highest ever” free cashflow generation, which is being returned to investors. “We anticipate additional payout with Q2 results,” the analysts stated.
“Iron ore supply/demand remains tight, despite new Chinese steel output restrictions, which have seen ore inventory pushed back onto the market, pushing prices down in recent weeks.” Copper pricing remains unchanged,” they added.
Anglo American and aluminum firm Norsk Hydro are among the materials stocks in Barclay’s overweight “Momentum Basket,” while copper miner Aurubis and Heidelberg Cement are in its Value Basket. Voestalpine Steel appears in both baskets.
Stock that took a hit by delta fears
Goldman has been measuring the actual reopening in the United States on a scale of 1 (complete lockdown) to 10 (complete reopening) (fully open). Despite rising new cases across the country, the index is now at an 8, up from 4 at the start of 2021.
Nonetheless, despite progress on the actual reopening, the shares associated with it have underperformed since March. Some of this is due to the stock market’s monster rally last year in anticipation of the reopening, but some is due to the delta variant wave dampening enthusiasm for travel and concerts.
The overall stock market continues to set new highs, with tech stocks reviving in recent months and offsetting the stumble of reopening plays. This year, the S&P 500 has risen by more than 18%.
However, Goldman believes that the reopening stocks are due for another surge.
“In the short term, we believe the market’s pessimism regarding the Delta variant has created an opportunity in some virus-exposed cyclicals,” said David Kostin, Goldman’s head of U.S. equity strategy, in a note.
Here are some of the companies in Goldman’s reopening basket, which has been 20 percentage points behind the S&P 500 since May.
Goldman also noted that this year, the basket of virus-exposed stocks has traded in lockstep with Treasury yields. Bond yields, which move inversely to prices, tend to rise when the economy is doing well. This relates to the delta variant, which is weighing on the trade.
The basket includes stocks in the travel industry such as airlines, cruise line operators, casinos, and travel booking companies. Many of these stocks have lost their 2021 rally and are now trading in the red.
Madison Square Garden and Las Vegas Sands have both lost more than 30% year to date, while Norwegian Cruise Line, Wynn Resorts, and Trip.com Group have also lost double digits.
Goldman recently raised its S&P 500 year-end target to 4,700 from 4,300, representing a 7% increase from current levels.
Chinese stocks
According to the country’s most recent census, released in May, 18.7 percent of China’s 1.41 billion population was 60 or older as of Nov. 1 last year. According to census data, this proportion was 5.44 percentage points higher than a decade ago.
An aging population, combined with low birth rates and a shrinking working-age population, poses a significant economic challenge to China, according to Jefferies in a report released on Monday.
As Beijing’s crackdown continues, these Chinese stocks listed in the United States may be relatively safe.
However, due to an aging Chinese population, some publicly traded companies may experience a “significant tailwind” in earnings, according to the bank. Jefferies has identified the following Hong Kong-listed stocks as potential beneficiaries:
Given that such services are likely to see “elevated demand,” eye clinic Euroeyes and dental prosthetics provider Modern Dental have stepped up their efforts.
Ping An Good Doctor, a company with exposure to telemedicine and private medical insurance, both of which Jefferies believes will grow rapidly.
As a result of an aging population, pharmaceutical companies Fosun Pharma and Wuxi Biologics believe that new illnesses will emerge to treat.
China Vanke and China Resources Land are property developers with investments or businesses in senior housing, such as care homes.
Sunac Services and Country Garden Services are two property management companies that may see an increase in business by managing homes for the elderly.
Workforce reductions
Mainland The rate of population growth in China has slowed. According to the most recent census, the country’s population was 1.41 billion as of November 1, 2020, having grown by an average of 0.53 percent per year over the previous decade.
Between 2000 and 2010, the population increased at a 0.57 percent annual rate.
How China is reshaping its economy through automation
“For the past four decades, China has relied on cheap labor and a large population to close the gap with the United States. However, with falling fertility rates and an aging population, China’s shrinking work-age population is likely to stymie growth,” according to the Jefferies report.
In the coming years, China is expected to overtake the United States as the world’s largest economy. However, a projected decline in China’s population would allow the United States to “re-overtake” China as the world’s largest economy by 2098, according to the bank.
According to the bank, China’s workforce will shrink from over 1 billion people in 2010 to just 580 million by 2100, citing a United Nations forecast.
According to Jefferies, this “may soon lead to lower output and growth, as well as worsening fiscal problems.”
