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CFDs are complex financial instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money. CFDs are complex financial instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.

Macro Intelligence: is China's economic stimulus a boost for Aussie stocks?

Explore how China's new economic stimulus measures could benefit Australian stocks like BHP and Rio Tinto.

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Article written by Juliette Saly (ausbiz)

Spotlight on China

In this week’s edition of IG Macro Intelligence, we take a look at the recent efforts by Chinese authorities to stimulate their economy, and Australian stocks that may benefit.

Bazooka fired?

Chinese authorities have announced new stimulus measures in their bid to bolster activity in the world’s second-largest economy. Their hope is that the economy will grow by 5% in 2024, a target that was looking increasingly unlikely before the latest stimulus measures were announced, especially amidst the ongoing property crisis.

China Homes Sales Source: Bloomberg
China Homes Sales Source: Bloomberg

On Saturday, 12 October, China announced plans to "significantly increase" government debt issuance to provide subsidies for low-income individuals, support the property market, and bolster state banks' capital, all aimed at revitalising its struggling economic growth.

Prior to the latest “bazooka” being fired, fewer than 20% of economists surveyed by Bloomberg expected China’s gross domestic product (GDP) to grow by 5% in 2024. However, following the latest round of stimulus measures, Goldman Sachs upgraded its 2024 GDP forecast to 4.9%, from 4.7%. The bank is also more bullish on 2025 growth in China, forecasting gross domestic product to increase by 4.7%, up from an earlier prediction of 4.3%.

Goldman economists Hui Shan and Lisheng Wang wrote in a note, “The latest round of China stimulus clearly indicates that policymakers have made a turn on cyclical policy management and increased their focus on the economy.”

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Drip feed

More stimulus could be on its way.

The National People’s Congress meets later in October. The upcoming policy briefing oversees the country’s budget, and last October, the Standing Committee of the NPC approved extra sovereign debt and increased the budget-deficit ratio. Analysts say it’s likely there’ll continue to be a “drip feed” of support until the year-end.

September’s stimulus announcement was met with a stock market rally that faded amid scepticism that the policy measures would be enough. On Monday, 14 October, after the latest measures were announced, the CSI 300 rebounded from its worst week since late July.

CSI 300 year-to-date

CSI 300 indext Source: Google Finance
CSI 300 indext Source: Google Finance

Market outlook for Chinese shares

Goldman Sachs is also bullish on the outlook for Chinese shares. Earlier this month, they upgraded their recommendation to overweight, tipping a further rally of 20% if authorities deliver on their promises. Conversely, analysts at Nomura are bearish. They wrote in a recent outlook that the recent rally could burst, in “a crash, reminiscent of the events in 2015.”

Where to trade

  • BHP

Raymond Chan from Morgans is among those who expect more piecemeal announcements from authorities towards the end of the year, telling ausbiz one of the best ways to play the thematic in the Aussie market is through the miners.

Jon Mills from Morningstar also told ausbiz that the short-term demand for commodity-related stocks like BHP and Rio Tinto looks good.

BHP daily chart

BHP daily chart Source: IG
BHP daily chart Source: IG

Mining sector insights

ASX Tradewatch data shows BHP shares are in a medium-term rally with the 5-day moving average above the 50-day moving average, and the 20-day moving average on the rise.

The average target price for BHP is $45.91, according to Refinitiv, with most analysts recommending you "Buy" the stock at current levels. Morgan Stanley has upgraded BHP to overweight with a price target of $47.10.

BHP average chart

BHP Mean Source: Refinitiv
BHP Mean Source: Refinitiv
  • Rio Tinto

Rio Tinto has underperformed BHP shares slightly in the past month and by 5% year to date. Shares are in a near-term rally within a longer-term bearish trend, according to ASX Tradewatch technicals.

Rio Tinto daily chart

Rion Tinto Daily Source: IG
Rion Tinto Daily Source: IG

Broader investment strategies

That suggests limited demand for the stock, however, the average recommendation according to analysts surveyed by Refinitiv is a "Buy" with a price target of $134.27, which suggests a rally of around 11% from its current levels.

Rio Tinto's recent acquisition of Arcadium Lithium puts it in good stead as a diversified player, with the miner set to become one of the top three lithium producers in the world.

Rio Tinto average chart

Rio Tinto Mean Source: Refinitiv
Rio Tinto Mean Source: Refinitiv

  • Treasury Wine Estate

Treasury Wine Estates is another way to “play the China trade”. Amid the lifting of trade barriers by China, sales of its flagship Penfolds brand have surged in the world’s second-biggest economy.

However, in June, the company’s CEO Tim Ford told investors it will take until 2027 for Treasury Wine Estates to rebuild its China business and return to the kind of profits it had experienced before the imposition of tariffs.

TWE daily chart

Treasury Wine daily chart Source: IG
Treasury Wine daily chart Source: IG

Shares are in a long-term bullish trend and the average recommendation on Treasury Wine Estates is a "Buy", according to Refinitiv. Macquarie has an "Outperform", saying the re-entry into Chinese markets is a plus. The broker has a price target of $13.90.

Treasury Wine Estates mean average

TWE Mean Source: Refinitiv
TWE Mean Source: Refinitiv
  • a2Milk

And when it comes to a2 Milk, Bell Potter has downgraded the stock from a hold to a 'sell'. "Let it go" is what the broker says after a2 Milk's recent rally, which was triggered by China’s stimulus. But Bell Potter argues this is not supported by fundamental changes and sees better value elsewhere in the sector. They’ve lowered their price target on the stock to $6.10.

a2Milk daily chart

a2milk daily chart Source: IG
a2milk daily chart Source: IG
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This information has been prepared by IG, a trading name of IG Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.
CFDs are a leveraged products. CFD trading may not be suitable for everyone and can result in losses that exceed your initial deposit, so please ensure that you fully understand the risks involved.

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