The much maligned Basic Resources sector continues to be under heavy scrutiny by investors having suffered heavy falls in response to plunging commodity prices and stalling Chinese economic growth. From peak to trough this year, the STOXX Europe 600 Basic Resource Index(SXPP) had fallen over -42% but a recent rally off the lows has divided the investment community as to which way the shares move next. Detailed ‘top down’ analysis across OTAS factors can help highlight sectoral themes to give a better understanding as to whether the latest move is further sustainable and what factors, if any, support this.
A good starting point is understanding current equity market sentiment. We capture this by (amongst other things) analysing trends in Short Interest. The current median for the SXPP is around 1.6% which is towards the higher end of its 1yr range, highlighted in the Stamps.
The chart below shows that the rally in basic resource share prices over the last month has been countered by a considerable up-tick in the median percentage of free float shares on loan suggesting that faster money accounts are continuing to position negatively into the rally. Whilst there has seen a small retracement in the last week or so, Short Interest still remains highly elevated compared to the last year.
The main table ranks those shares which currently have the highest total % of shares on loan, Fresnillo (12.5%) and Arcelormittal(8.85%) are by far the most borrowed shares currently, whilst Voestalpine and Rangold Resources saw the most aggressive increase in the last week. Clicking ‘Current’ under Days to Cover, the column will re-rank and the stocks with the highest degree of squeeze risk will be shown: Fresnillo, Voestalpine and Polyus Gold with 8, 7 & 6 days to cover respectively.
Further analysis can be gauged using the detail in other factors like EPS momentum, where the main stamp shows a continued downward average trend in earnings momentum, with c-10% negative revisions over the last month, whilst the valuation chart on the main page shows the median sector P/E is currently still only mid-range and(even after the downturn,) is not flagging as extremely undervalued as share prices have kept pace with downgrades.
There is some good news however, 4 names have seen sector beating EPS revisions in the last month: Stora Enso, UPM, Polyus Gold & Mondi have all seen small upgrades to consensus earnings. Changing the price column will let you see if these shares have performed in a similarly positive manner over the same period or whether potential opportunity is evident. There is also a column which shows whether stocks are currently trading at a discount or premium to the current analyst price target.
Additional sentiment may be provided by the Insiders stamp which analyses discretionary buy & sell transactions by company directors and large shareholders. Neither have been heavily investing in their own shares with just €2.8m worth of stock being bought in the last month by internal directors at Glencore, RIO’s & Imerys.