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London stocks kept a foothold in the green Monday, helped by a positive start for August across global equities and gains for the heavily weighted mining sector, following a bullish ratings upgrade by JPMorgan.
The bank’s global equity strategy team lifted miners to overweight from neutral, commenting that after a stretch of weakness — 16% off first-quarter highs — “the valuation gap emerging relative to spot prices/earnings provides an opportunity for outperformance.”
From the bank’s European mining, metals and steel team, lead analyst Luke Nelson, said earnings to date have confirmed “diversified miners’ capital returns credentials.” He said high conversion of free cash flow into dividends are likely to continue thanks to strong balance sheets, limited capital expenditure and low operating leverage.
“Furthermore, ESG considerations will likely mean corporate strategy will err
on the side of caution around growth and M&A, further limiting potential
drains on excess capital,” said Nelson, in an Aug. 2 note to clients. The group’s top mining picks are BHP, Rio Tinto and Glencore, all weighed overweight.
Rio Tinto
RIO,
RIO,
shares rose by nearly 2%, with BHP
BHP,
BHP,
and Glencore
GLEN,
shares up more than 1% each.
Citigroup also released a bullish note on the sector Monday, with analyst Ephrem Ravi saying the sector has the “potential to rerate as the underlying commodities continue to perform well and companies are stepping up cash returns to the shareholders.”
Anglo American
AAL,
shares climbed over 4%. Last week the miner reported a sharply higher first-half profit and said it would return $4.1 billion to shareholders via dividends and share buybacks. Berenberg analyst Richard Hatch said those earnings shot past their expectations, and they view buy-rated Anglo “as a compelling growth story with an attractive shareholder return upside angle.”
Weighing on the downside in London were shares of Unilever
UL,
UNA,
which fell over 1%. The FTSE 100 rose 0.6% to 7,079.72.
Among smaller companies, shares of Meggitt soared 54%, helping to drive a 0.8% gain for the FTSE 250 after the U.K. aerospace company agreed to an acquisition by U.S. industrial group Parker Hannifin.
That bid also lifted shares of Melrose Industries
MRO,
up 5% and a top gainer for the FTSE. The company that buys and improves underperforming companies also has interests in aerospace and defense after buying GKN in 2018, noted Russ Mould, investment director at AJ Bell.
“It would be interesting to see if this predator becomes prey, as Melrose has historically been the one doing the bidding,” Mould told clients in a note.
