The cyclical stocks to benefit as global recovery broadens

As surging mining stocks hit reverse, we discuss why and examine prospects for the year ahead.

A disappointing update from Fresnillo (LSE:FRES) set the tone in the commodities sector today as a recent pullback for shares in heavyweights including Anglo American (LSE:AAL) and Rio Tinto (LSE:RIO) continued.

Their retreat since a record-breaking first week of the year for the FTSE 100 index comes amid fears that more contagious variants of Covid-19 will derail the economic recovery in 2021.

The mood of caution has given an opportunity for investors to book profits in the cyclical areas that had performed well from early November, when vaccine breakthroughs first emerged.

• Invest with ii: Top UK Shares | Share Prices Today | Open a Trading Account

As we detailed following a note by Deutsche Bank earlier this month, some valuations had been starting to look full. Rio Tinto, for example, is now down 9% from its peak in mid-January, including today's 3%, while Anglo American is 15% lower since 8 January.

• ETFs for investing in the new commodity supercycle
• Share valuations made simple
• Commodities have never been so cheap

Deutsche's note forecast a cyclical peak in commodity consumption and prices by the middle of the year and that a “stronger-for-longer” view on iron ore was more than priced in. The bank withdrew its ‘buy’ recommendation on Rio, but continued to favour Glencore (LSE:GLEN) and Anglo after raising price targets to 320p and 3,000p respectively.

Since then, there's been slow progress on US stimulus measures as well as renewed concerns about Chinese demand following a resurgence in Covid-19 cases there ahead of the Lunar New Year. China's economy managed to avoid contraction in 2020, boosting hopes that its steel industry will underpin global demand for iron ore and other key commodities.

There's also little sign yet of a return to anything close to normality for European economies, given the tighter restrictions on movement and recent concerns over vaccine availability.

Energy stocks have also felt the pressure, although Brent crude oil prices bucked the downward pressure today after figures showed a surprise fall in US stockpiles. Overall, the FTSE 100 index shed half a percentage point to just above 6,600, having been 6,873 earlier in the month. 

• The big mining stocks to buy now
• Small-cap mining share tips for 2021

The fallers board in London was led by Fresnillo, with shares down 9% after it issued lower gold and silver production guidance for 2021 to reflect ongoing Covid-19 uncertainty in Mexico and a minor landslip at its Noche Buena mine.

The company, which is Mexico's largest gold producer and has seven operating mines in total, also reported a decline in output for 2020 due to restrictions caused by the pandemic.

The recent lacklustre performance of London shares is in contrast to Wall Street, where an upbeat earnings season continues following last night's record quarter for Microsoft.

UBS notes that 89% of US companies have beaten fourth-quarter earnings estimates so far, with earnings per share set to grow 26% overall in 2021 and by 11% to $195 in 2022.

Mark Haefele, chief investment officer of UBS Global Wealth Management, said global stocks remain volatile and investors continue to be swayed by fast-moving news on the pandemic.

• The mining stock to own in 2021
• Take control of your retirement planning with our award-winning, low-cost Self-Invested Personal Pension (SIPP)

While recent setbacks for markets have been led by cyclical stocks, Haefele expects this trend to be reversed by encouraging fundamentals. He added: “We continue to hold a positive outlook on stocks and see cyclically sensitive markets leading the way as the global recovery broadens.”