A week after the Federal Reserve made the first 50 bps rate cut since 2020, the People’s Bank of China (PBOC) followed suit on Wednesday. The central bank lowered interest on one-year medium-term lending facility (MLF) loans from 2.30% to 2.00%, worth around $42.66 billion.
This is on top of a seven-day interest rate (reverse repo) from 1.7% to 1.5%. To further boost the confidence in the banking system, commercial banks will be able to reduce their reserves by 0.5%, effectively freeing $142 billion worth of loans to businesses and households.
Investors could also look forward to eased requirements for banks’ loans to companies for stock buybacks, worth around $43 billion. Combined with Tuesday’s stimulus package, China made it easier to access over $300 billion worth of capital.
The timing for this monetary intervention is revealing. PBOC likely waited for the Fed to start cutting interest rates first in order to mitigate international capital flight risk. Expectedly, Chinese indexes rose alongside European and Australian mining stocks, by 4.6% and 2.8% respectively.
Chinese blue chip stocks (CSI 300 Index) gained 1.48%, returning to early August level, now up 15% year-to-date. In the US, silver futures for December rose 6.6% over a 5-day period followed by copper futures by 6.4% for the same month.
Although the mining sector saw the largest boost immediately after China’s monetary shift, a similar effect should be expected in the tech sector. It is yet unclear if China will follow monetary stimulus with a financial one.
In that scenario, these companies should see a more sustained boost to their valuations.
Estée Lauder Companies, Inc.
With aggressive stimulus measures on the table once again, the disposable income pool is poised to deepen and boost consumer confidence. This is already evident from the rise of European luxury stocks (.STXLUXP) by 2.5%, given their reliance on Chinese consumer spending.
In August’s fiscal Q4 2024 earnings, New York-based Estee Lauder Companies Inc (NYSE:EL) made it clear that this has had a negative effect on the firm’s bottom line.
“For fiscal 2025, we anticipate continued declines in the prestige beauty segment in China, mainly reflecting persistent weak sentiment among Chinese consumers.”
Overall, the trend resulted in $0.39 billion net income vs $1.01 billion in the year-ago quarter. However, with mainland China decline excluded, Estée reported a 3% increase in organic net sales. Investors should consider if this is the early stage of trend reversal.
In the meantime, Estée holds $5.7 billion in total current liabilities vs $5.3 billion of total equity, resulting in a 1.46 debt-to-equity ratio. The company’s forward price-to-earnings ratio is 32.15 while its enterprise value-to-revenue ratio is 2.53.
In August, Piper Sandler raised EL price target to $114 from its previous neutral rating, while Bank of America downgraded it from $140 to $100. As of Tuesday, DA Davidson research firm gave EL a $130 price target.
Year-to-date, EL stock is down 36% against the 52-week average of $125.60. Per Nasdaq forecasting data, the average EL price target is $107.24, giving investors a potential 16% upside.
Freeport-McMoRan, Inc.
Freeport-McMoran Copper & Gold Inc (NYSE:FCX) is one of the world’s leading mining and refining companies, specifically for high-quality copper, gold, and molybdenum. In fiscal year 2024, the company’s largest revenue source remains copper, at around 55% vs gold at 4% and molybdenum at 12%.
Due to an unprecedented copper theft spree in 2024, FCX stock steadily rose by 27% in the first six months. After the market correction, FCX shares are down 3.42% over the last three months, slowly returning to mid-July level.
A boost in infrastructure spending in China would significantly benefit Freeport-McMoRan as copper prices rise further. After the recent Fed rate cut, copper price climbed to its highest level since mid-July to $4.50 per pound.As of the latest Q2 2024 earnings report, Freeport holds a tiny $0.3 billion debt, having generated $616 million net income vs $343 million in the year-ago quarter.
Against the 52-week average of $43, FCX stock is now priced at $48.33 per share. Per Nasdaq’s forecasting data, the average FCX price target is $55.33, giving investors a potential upside of 14%. Given that the forecasted bottom for FTX stock is $50 per share, this makes it one of the safest investing exposures.
Tencent Holdings
Since the coverage in late August, Tencent Holdings Ltd (HK:0700) ADR (OTC:TCEHY) stock is up to $52.62 from $48.53 per share. As noted then, this Chinese giant holds great sway across the West’s gaming industry, but it also boosts it with heavy AI investments. With more favorable monetary conditions in China, this trend is likely to continue.
Year-to-date, TCEHY stock, available as American Depositary Receipts (ADR), is up 40%. Unburdened by DEI policies, China’s SMIC recently broke through the sub-8nm barrier with the development of its own deep ultraviolet (DUV) lithography machine, according to China’s Ministry of Industry and Information Technology (MIIT).
In turn, rendering US sanctions useless greatly benefits Tencent in the long run as it shifts to domestic alternatives for its generative AI capabilities via Tencent Cloud. On top of this positive outlook, Tencent pledged to double stock buybacks in 2024 from 2023, having spent $6.71 billion on share repurchases in H1 2024.
PBOC’s latest eased requirement for commercial banks’ loans for that specific purpose makes Tencent’s stock buybacks even more feasible.
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Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.