ASX 200 miners just had their best week since 2015: What happens now?

The S&P/ASX 200 Materials Index just had its best week since October 2015, propelled by China's aggressive stimulus push to support its ailing economy.

The Index rallied 9.3% last week to a three-month high, led by names such as MinRes, Sandfire Resources and South32 – all of which gained more than 15%. But where do we go from here?

S&P/ASX 200 Materials Index 12-month chart (Source: Market Index)

Resource stocks have V-shaped their way into extreme overbought territory and such overbought conditions can unwind very differently based on whether it's a bull or bear market. In a bull market, overbought stocks can become even more overbought. But in a bear market, the stocks often collapse under their own weight.

Previous Resource Rallies

Such significant rallies are uncommon. Since 2007, the S&P/ASX 200 Materials Index has surged 9% or more in a single week only seven times. Analysis of these instances suggests a bullish outlook for future returns, though the dataset is limited.

Source: Market Index

Source: Market Index

2007-08 Global Financial Crisis

In response to the global financial crisis, China launched a massive 4 trillion yuan (US$580 billion) stimulus package in November 2008. Key measures included:

• Infrastructure: Over half the 4 trillion yuan stimulus was allocated to infrastructure development, including roads, railways, airports, power grids and other public works.

• Tax cuts and subsidies: Tax reductions were implemented for businesses and individuals, as well as subsidies for home appliances and rural consumption programs.

• Support for social services: Increased spending on healthcare, education and housing, particularly affordable housing.

• Monetary easing: The PBoC slashed interest rates (from around 7.5% to 5.3% by December 2008) and reduced bank reserve requirements.

Did it work: The 2008-09 stimulus helped China achieve 9.4% GDP growth in 2009, making it one of the few major economies to recover quickly from the global recession.

2014-16 Economic Slowdown

As China's economy slowed in the mid-2010s due to structural issues, the government implemented several measures:

• Monetary easing: The PBoC cut interest rates six times from 6.0% to 4.35% by October 2015, reduced reserve requirement ratios and devalued the yuan to make exports more competitive in global markets.

• Debt swaps for local governments: China launched a local debt swap program which allowed local governments to issue bonds to replace high-interest loans.

• Infrastructure spending: The government renewed its focus on infrastructure spending to counter the slowdown, including railways, highways, airports and power infrastructure.

• Supply-side structural reforms: In 2015, China launched supply-side structural reforms, aimed at reducing industrial overcapacity (especially in coal and steel), deleveraging corporate debt, and cutting excess housing inventory.

• Support for the stock market: After the 2015 stock market crash, the government intervened by purchasing stocks, suspending initial public offerings (IPOs), and limiting stock sales to stabilise the market.

Did it work: The stimulus measures helped stabilise GDP growth, which slowed to around 6.8% by 2016 but prevented a more severe downturn. However, the continued reliance on debt to fund growth led to rising concerns about financial risks, particularly in local government finances and the real estate sector.

2024's Deeper Slowdown

China's recent policy announcements aim to achieve a 5% GDP growth target while shifting focus towards high-quality growth and technological advancement. The stimulus measures include:

• Monetary easing: A 20 bp cut to the seven-day repo rate, which will lower medium-term and loan prime rates by approximately 25-30 bps. The Reserve Requirement Ratio (RRR) was also lowered by 50 bps, freeing up approximately 1 trillion yuan (US$142 billion) for new lending.

• Homebuilder and household relief: Commercial banks will be guided to lower interest rates on existing mortgages by 50 bps to provide relief for households. Down-payments for second-home buyers will be eased from 25% to 15%

• Subsidies: Plans to issue special sovereign bonds worth approximately 2 trillion yuan (US$284 billion) to stimulate consumption and help local governments tackle debt problems, according to Reuters. A further 1 trillion yuan (US$162 billion) is also planned to boost subsidies on a consumer goods replacement program and business equipment upgrades

Will this time be different?

Citi analysts note that the current measures differ from the post-GFC stimulus of 2008, which heavily targeted infrastructure. Today's economic challenges are more deeply rooted, requiring comprehensive stimulus and reform.

However, the analysts believe "we could rally further on momentum and positive newsflow, but there is much uncertainty in the near-term amid a lack of China stimulus detail, US labour market deterioration, and election uncertainty."

While local resource stocks have re-rated massively off the back of last week's stimulus, the analysts favour a strategy that involves adding "on pullbacks to commodities with supply constraints and China energy transition exposure, such as aluminium and copper."

They also warned that "some of China’s ‘stimulus’ policies appear bearish steel and iron ore demand, specifically the stated desire to de-stock property inventory and restrict new supply."