The US market rallied into a new bull market last night as it chalked up a gain of 20% since hitting the bottom. But that’s only fuelling debate on whether the recent rally is a false dawn.
ASX investors are just enjoying the sunshine with the S&P/ASX 200 Index (Index:^AXJO) (ASX:XJO) climbing 0.8% in morning trade. We aren’t close to the 20% or more gain from the recent low to qualify for the “bull market” definition as the ASX 200 is only up around 13%.
However, regardless of whether the four-day surge is a dead-cat bounce or a sustainable turnaround from the bear market, there is one sector that is better placed than most to outperform.
Australian miners in pole position
This is the ASX mining sector and those with large local operations look best placed to run ahead over the short- and medium-term.
There are a few reasons behind this bullish assessment. First is the fact that mining activity in South Africa and Canada have come to a screeching halt as these governments have ordered the industry to down tools to contain the coronavirus pandemic.
Assuming Australia resists such a move to keep our economy off life support, our local miners will be facing far less competition for the next several weeks, if not a little longer.
Secondly, China is slowly but surely reopening. The Chinese are the biggest buyers of our minerals and authorities there are likely to unleash a construction spree to get its economy back on its feet. That means greater demand for Australian ore at a time when other countries have shuttered.
Further, most of our producers have ample cash on their balance sheet to survive a worst than expected hit from the COVID-19 recession.
This is important because companies are currently facing a cash crunch and will need to scramble to find capital. Even well-run companies are not immune – just ask Flight Centre Travel Group Ltd (ASX: FLT) and Cochlear Limited (ASX: COH).
Lastly, many ASX miners are trading at attractive valuations even though they haven’t been quite as badly hit by the coronavirus-induced market meltdown.
On this last point, Morgan Stanley is tipping the share prices of three ASX miners to rise over the next two months or so.
3 ASX miners set to run higher
The OZ Minerals Limited (ASX: OZL) share price is one that’s on the broker’s list. Morgan Stanley upgraded the stock earlier this week and slapped a price target of $10 on the stock.
“We have upgraded OZL to [overweight] (from equal weight) as the stock looks cheap at current levels (showing 67% upside) and offers exposure to a post-crisis uptick in the copper price,” said the broker.
“In addition, OZL has low cost copper-gold production and considerable growth options.”
Another that Morgan Stanley thinks will jump over the next 60 days is the Evolution Mining Ltd (ASX: EVN) share price.
The strong demand for safe haven assets like gold as well as Evolution’s cheap valuation prompted the broker to lift its recommendation on the stock to “overweight” with a price target of $4.10 a share.
Mineral sands producer Iluka Resources Limited (ASX: ILU) also got bumped up to “overweight” by the broker. The miner’s plan to spin off its iron-ore royalty business will help crystallise value. Morgan Stanley’s price target on the stock is $10.05 a share.
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Brendon Lau owns shares of OZ Minerals Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Cochlear Ltd. The Motley Fool Australia owns shares of and has recommended Flight Centre Travel Group Limited. The Motley Fool Australia has recommended Cochlear Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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