What happened
Shares in mining company Rio Tinto (RIO 0.43%) surged 12.3% in January according to data provided by S&P Global Market Intelligence. The move marked a return to favor for miners on the stock market after a difficult six months for the sector.
Mining stocks like Rio Tinto didn't exit 2018 in the same way they entered the year. Going back to the start of last year, there were high hopes that the sector's revenue growth would accelerate after a year of recovery in 2017, and in doing so, embark on a long upcycle of growth. For example, companies that service the industry, such as Caterpillar, were expecting increases in miners' capital spending to drop into their bottom lines as optimism improved from a period of revenue declines from 2012 to 2016.
Image source: Getty Images.
However, worries over global growth, and in particular in China, and falling metals and minerals prices have created concern. China is still the key swing factor in determining global commodity demand, and any slowdown in the country is likely to hurt demand for Rio Tinto's iron ore, copper, aluminum, and coal. Rio Tinto is seen by some as the best dividend stock in the mining sector.
That said, when the market turns positive and shrugs off concerns -- as evidenced by the S&P 500 rising nearly 8% in January -- then mining stocks are highly likely to outperform.
So what
Not much has changed on the fundamental front, save for the market learning to live with reset expectations for economic growth from China. In addition, investors continue to wait for a comprehensive resolution to the trade dispute with the U.S. -- something unlikely to happen until China satisfies President Trump on the issue of the theft of intellectual property.
The issues have obviously had an effect. For example, Cummins and Caterpillar have both noted a pause in capital spending from miners, but the question is whether this is the start of a downturn or, as the management of Cummins and Caterpillar see it, a temporary slowdown. At this stage, it's hard to tell. Miners cut capital spending plans when they are fearful of weakness in end markets.
Check out the latest Rio Tinto earnings call transcript.
Now what
In tandem with monitoring trade discussions and the growth trajectory of the China economy, investors should keep a watchful eye on commodity prices. Mining stocks are always seen as a proxy for global industrial growth -- particularly from emerging markets thirsty for infrastructural spending. As such, Rio Tinto's exposure to steel (iron ore and coal) and copper (widely used in industrial applications such as electrical wiring) ensures it will be seen a stock to play growth in emerging markets.
