By Michael Brush, MarketWatch
Stocks that I said were unfairly beaten down by fears over the coronavirus took off this week as China’s central bank stepped in to cut interest rates and support the economy.
By the end of Tuesday, the 14 stocks I suggested last week were up about 2.6%, almost twice that of the S&P 500 Index /zigman2/quotes/210599714/realtime SPX -1.51% and the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -1.69% .
Nike /zigman2/quotes/203439053/composite NKE -1.60% , Walt Disney /zigman2/quotes/203410047/composite DIS -3.19% , Starbucks /zigman2/quotes/207508890/composite SBUX -3.00% , Hyatt Hotels /zigman2/quotes/207542923/composite H -0.57% , Wynn Resorts /zigman2/quotes/208845907/composite WYNN -7.92% , Marriott International /zigman2/quotes/200170042/composite MAR -6.22% , Tapestry /zigman2/quotes/207417762/composite TPR +0.73% and GreenTree Hospitality /zigman2/quotes/206548193/composite GHG -3.67% — all of which do big business in China — led the way, with gains of up to 5%. They have more to go, but here’s another way to bet against exaggerated coronavirus fears: Buy industrial metals.
The reason: China is not done with stimulus. The People’s Bank of China is going to announce big fiscal spending programs to offset the economic hit from cornonavirus, believes Larry McDonald, author of the Bear Traps Report .
That will boost industrial metals, which you can get exposure to by purchasing the SPDR S&P Metals and Mining ETF /zigman2/quotes/209640763/composite XME -2.67% , Global X Silver Miners /zigman2/quotes/207060602/composite SIL -2.94% , and iShares MSCI Chile /zigman2/quotes/205935893/composite ECH +0.70% and iShares MSCI Brazil Index /zigman2/quotes/208893627/composite EWZ -5.51% because those two produce industrial metals including copper and iron ore. Below I also list six mining companies that insiders and analysts say look attractive.
The deadly coronavirus will shave as much as 1.3 percentage points off China’s gross domestic product (GDP) this year, say economists at Barclays, which would bring growth down to 4.7%. Chinese officials are not just going to stand by.
“China responded to shocks with fiscal juice in 2009 and 2016, and it won’t be different this time,” says McDonald. “When you get the fiscal response from China, these stocks are going to be up 50% to 60%.”
Fresh fiscal stimulus from China will get layered on top of more than $1 trillion in 2020 “fiscal juice” already coming from China, Japan, South Korea, India, the U.K. and the U.S., among others.
“The coronavirus only will accelerate the government-spending largess,” says McDonald.
The Fed will join the party
China won’t be the only country adding stimulus to the global economy. Other central banks will join in, including the Federal Reserve. The Fed had already signaled it will get accommodative if the economy deteriorates, notes Bruce Bittles, chief investment strategist at Baird. The coronavirus may make that happen.
Goldman Sachs economist Jan Hatzius thinks coronavirus will take away 0.4 percentage point of U.S. growth in the first quarter due to lower tourism from China, and weaker U.S. goods exports to China. Recent indicators including the Chicago Business Barometer and December durable goods orders already showed significant weakness in manufacturing even before coronavirus, and U.S. growth has not been great, at a little over 2%.
Other risk-averse central banks such as the Bank of England and Reserve Bank of Australia will be quick to join in, says Goldman Sachs economist George Cole.
Here are five more reasons why it makes sense to get exposure to industrial metals now.
1. Coronavirus fears recede
Harvard University virus expert Michael Mina thinks coronavirus will most likely spread far and wide globally, given the speed at which it spread in China. Less developed countries with more rudimentary health-care systems will get hit particularly hard, especially in areas where people live in close quarters.