If you aren't already betting on metals and mining stocks, you ought to consider doing so now.
A likely rebounding Chinese economy should help boost demand for metals and materials, which in turn should help further lift the mining stocks, such as those held in the iShares MSCI Global Metals & Mining Producers (PICK - Get Report) exchange-traded fund.
The sector faces "a 'Goldilocks' backdrop," states a recent report from British bank Barclays, which cites dovish interest rate policy from the Federal Reserve, improving economic conditions in China, and positive U.S.-China progress on trade.
Goldilocks is a term often used to describe a perfect balance of neither too hot nor too cold, economically speaking.
Already the mining sector has done well over the past three months or so. Global mining firms BHP Group (BHP and Rio Tinto (RIO were recently up 24% and 38%, respectively, so far this year according to Morningstar. Both produce iron ore as well as other industrial metals.
They could go even higher.
"Despite the strong sector rally [year-to-date] we believe investors should stay long," the Barclays report states. Among many factors, it cites a likely three-to-six-month lag before the effects of the recent Chinese government stimulus show up in increased metals demand. Put another way, stay invested in the sector.
Here's the detail:
The Fed has made clear its intentions to pause interest rates increases this year. That's a move that will likely make the dollar weaker than it would otherwise have been. In turn that should help boost prices for metals. Commodities prices tend to rise when the dollar is weak.
Already there has been some increase in metals prices this year. Iron ore, which is a crucial component in steelmaking, has risen 33% year-to-date, according to data website Tradingeconomics, while metals copper and zinc are up 12% and 18%, respectively, over the same period, according to Bloomberg.
In other words, with the Fed likely holding its interest rates steady, the sector should see a tailwind.
Later this year China's economy is set to heat up once again following its recent slowdown. Analysts expect the Chinese economy grew at the "slow" rate of 6.3% in the first quarter, down from 6.8% in the same period a year ago.
But the government's recent efforts to boost the economy should start paying off shortly with growth accelerating within a few months.
"The larger than expected rise in new loans and aggregate financing suggests that previous stimulus is working its way through the system," states a recent report from New York-based bank Brown Brothers Harriman. "As such, we should start to see some improvement in the real economic data too."
In other words, China's financial metrics are looking solid, and that should translate into increased economic activity including in the construction business where materials get used.
That's good overall for metals demand. However, there is some nuance to which sectors will benefit.
"Infrastructure will likely see a large rebound this year," says Rory Green, an economist for China and North Asia at financial firm TS Lombard in London. He notes that already local governments have made their largest first-quarter bond issuance on record.
That infrastructure spending will likely involve a variety of things including building new roads. That is particularly good for the iron ore producers such as Rio Tinto (RIO and BHP (BHP . That's because infrastructure projects typically involve increased use of steel, which gets made from iron-ore and coal.
The increased demand from such projects may get offset by lower demand from the housing sector. "Housing will be a bit weaker this year.," says Green. He cites changes in Chinese government housing policy as a key part of the reason for the likely cooler housing sector.
That will likely weigh on copper demand. Copper gets used for electric wiring in homes.
It's hard to predict any negotiations involving U.S. president Donald Trump, but the signals suggest that a mutually favorable outcome of the U.S. China trade talks is in the cards.
That would be good for world growth because the two countries are the largest economies in the world. When they trade with each other freely, then the entire global economy should benefit, and that means more industrial metals will get used.
It's not just the economy that will help this continued rally. The firms themselves are solid.
"[...] disciplined capital allocation, under-leveraged balance sheets, attractive valuation multiples," should provide a backdrop "for outperformance to continue," the Barclays report states.
Constable owns none of the securities listed in this story.