Energy, copper could outperform in China

China’s growth prospects look promising, says Scott Vali, formerly vice-president, Equity, for CIBC Asset Management.

“[During] a trip through China recently,” he explains, “We saw there was a notable slowdown in Macau, mostly as a result of the [gambling] anti-corruption stance that the government has taken.

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“But, beyond that, we were pleasantly surprised with the activity within the country. Although there has been a slowdown, […] 7% growth is still very robust relative to the rest of the world.”

Even better, “the government is continuing to be pro-growth. We’ve seen some recent cuts to their interest rates, and some freeing up of some of the policies around second mortgages. [So], we’re going to see continued growth in the country, and that should be positive for a lot of companies.”

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What’s driving energy?

During his trip, Vali met with the senior management teams of major oil companies such as Husky. These teams find the demand side of natural gas may soon benefit, he says, “as the government in China continues to look for clean sources of power in order to address some of the environmental issues they’ve seen over the past few years. So demand from that perspective continues to look very strong.”

As a result, “We continue to be overweight the energy sector. After the pullback from last summer, [it] will continue to be robust going forward.”

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China’s energy sector is also benefiting from increasing automobiles sales, specifically of larger vehicles such as SUVs, says Vali. “That’s all positive for fuel demand and [for] oil.”

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Plus, as the Chinese power grid is expanded to meet consumer demand, electrical wire is becoming a hot commodity. Within cities, ultra-high voltage power lines are copper-based, making the commodity a good buy.

“In the past,” says Vali, “we’ve seen one ultra-high voltage line developed [per year] in the country. Going forward, there’ll be three [or more] lines developed per year […] as the government tries to integrate the power infrastructure.”

City power grids will also demand more copper, he adds, because “they’re increasing the power [going] into the cities from 100- to 300-kilovolt lines, or from 300- to 500-kilovolt lines—that requires a more robust amount of copper. And, they’re looking to bury the lines, which requires slightly more copper.”

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To add to that, China’s railways may need more copper in coming years. “The government has been pushing [for] development. And, it’s important to remember most of the rail in China is electrified, so it’s very copper-intensive. That will be supportive for the price of copper.”

So Vali is overweight copper, despite usually being underweight materials. “As we look out a couple of years, the additional mine supply [of copper] is lacking. You require higher copper prices to incentivize that supply, and that will be needed as we move into 2017 and 2018. So we continue to have a favourable outlook.”

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