As the iron ore price posted its sharpest fall in five years, albeit after an almighty upward run, a heavyweight London broker has tipped the metaphorical bucket of cold water over the prospects for mining stocks.
JP Morgan Cazenove believes investors are probably over-estimating the potential impact of a Trump presidency on the sector and not really assessing the risks.
As a result, the rally in industrial metals values seen over the last week is probably out of touch with reality, it added.
Trump is seen as potentially setting underway a whole raft of infrastructure projects that rely on the commodities such as iron rebar, steel and aluminium to get built.
However, some commentators in the US are already questioning the President-elect’s credentials as America’s great builder.
At the same time, there is the very real prospect he will break off long-standing trade alliances that could send the markets into turmoil.
JPMC analyst Fraser Jamieson thinks the risks have thus far been underplayed.
“Significant uncertainty remains over the extent to which the Trump administration will deliver on campaign promises,” he said.
“However, we believe the market has focussed too strongly on the potential fiscal benefits while largely ignoring trade risks, and as a result metal prices have overshot near-term fundamentals, notwithstanding improved supply and demand fundamentals this year.”
Against this backdrop, Jamieson is prefers mining stocks with “baked in the biggest cushion to lower commodity prices and have definable catalysts”.
Story by ProactiveInvestors