TRADEIDEAOut-of-the-moneycallspreadcollarontheEuropeBasicResources(SXPP)sector:LongSXPPJun19480(103%)call,shortSXPPJun19510(109%)call,shortSXPPJun-19410(88%)put,indicativenetpremium0.3.Indexref.SXPP465.6Risk:theriskofacallspreadcollaristheoreticallylimitedtothenotionalexposureEQUITY&DERIVATIVESKEYMESSAGESWeseeupsidetotheSXPPBasicResourcessectoronthebackofseveralkeydrivers:(a)attractivevaluation;(b)improvingearningsmomentum;(c)risingcopperprice(despiteaslowingglobaleconomy);and(d)ourexpectationofaweakerUSdollar.Thekeyshort-termupsidecatalystsforthesectorare,inourview,animpendingUS-ChinatradedealandpositivemacroeffectsfromChina’screditstimulus.FLASH|EMEA25February2019Withglobalgrowthslowing,shouldtheSXPPBasicResourcessectorbesuffering?Lookingattheslumpinmetalspricesaroundthemiddleof2018,webelievethismacroslowdown(focusedonChinainthecaseofindustrialmetals)hasbeenpartiallyfactoredin.Moreinterestingly,sincelastOctobermetalsprices,ingeneral,andcopperprice,inparticular,havepickedupandarecontinuingtorecover(Fig.1),likelyboostedbytheheavystimulusinjectedbyChinaintoitsdomesticeconomysincetheturnoftheyear,withafocusoninfrastructureinvestments.AkeybeneficiaryofthisnascentrecoveryinindustrialmetalspricesistheEuropeanBasicResourcessector(SXPP),whichemphasisesonglobaldiversifiedmininggroups.Indeed,thecorrelationbetweencopperpriceineurosandtheSXPPindexlevelhasbeentightsince2016(Fig.2).Fromafundamentalviewpoint,whilethebasicresourcessectorisclearlycyclicalandthusrelativelyvolatile,weseeaninterestingcombinationofmorefavourableearningsmomentum,whichcouldbenefitfurtherfromhighermetalsprices(Fig.3),andrelativelyattractive5.8xvaluationonforwardEV/EBITDA,wellbelowthe6.5xhistoricaverage(Fig.4).PleaserefertoimportantinformationandMARdisclosuresattheendofthisreportBasicResources:ChinainyourhandFig.1:Despiteglobalslowdown,metalspricesrallyFig.2:SXPPsectordrivenbycopperpriceSources:Bloomberg,BNPParibasSources:Bloomberg,BNPParibas1EdmundShing,GlobalHeadofEquity&DerivativeStrategyBNPParibasL...
