Trade tussle will heap more pressure mining stocks - UBS

Base metals have borne the brunt of negative sentiment so far, given higher exposure to trade, but UBS retained its 'overweight' global mining call, but said risks are rising.

UBS expects China to strongly protest the new US trade actions, but doesn't see it degenerating soon into an all-out trade war. China may adjust the pace of domestic monetary tightening as part of its response, which could boost domestic demand to partly offset against lower exports.

Commodities are expected to come under pressure from concerns over global growth, as tariffs increase the cost of trade and this in turn lowers trade volumes, related industrial production and commodity demand, hence commodity prices.

"But detail matters," UBS analysts said. "Direct impacts are negative but modest, as mined commodities are amongst a very broad range of targeted goods. Second round impacts, as commodity demand for supporting factories and infrastructure eases, will compound first round effects."

Washington's announcement this week "tilts risk away from our base case and toward trade war escalation", the analysts said, adding that China's response is key.

"We expect the sector to come under pressure as generalist investors re-assess. Bulk commodities have outperformed base metals, plus environmental/structural reform expected to aid the aluminium complex, stocks like Hydro and Alumina Ltd may provide relative performance."

The large diversified miners, BHP Billiton and Rio Tinto "are likely to feel selling pressure most, given liquidity and preferred play status for the generalists".