1、TRADE IDEA Out-of-the-money call spread collar on the Europe Basic Resources(SXPP)sector:Long SXPP Jun19 480(103%)call,short SXPP Jun19 510(109%)call,short SXPP Jun-19 410(88%)put,indicative net premium 0.3.Index ref.SXPP 465.6 Risk:the risk of a call spread collar is theoretically limited to the no
2、tional exposure EQUITY&DERIVATIVES KEY MESSAGES We see upside to the SXPP Basic Resources sector on the back of several key drivers:(a)attractive valuation;(b)improving earnings momentum;(c)rising copper price(despite a slowing global economy);and(d)our expectation of a weaker US dollar.The key shor
3、t-term upside catalysts for the sector are,in our view,an impending US-China trade deal and positive macro effects from Chinas credit stimulus.FLASH|EMEA 25 February 2019 With global growth slowing,should the SXPP Basic Resources sector be suffering?Looking at the slump in metals prices around the m
4、iddle of 2018,we believe this macro slowdown(focused on China in the case of industrial metals)has been partially factored in.More interestingly,since last October metals prices,in general,and copper price,in particular,have picked up and are continuing to recover(Fig.1),likely boosted by the heavy
5、stimulus injected by China into its domestic economy since the turn of the year,with a focus on infrastructure investments.A key beneficiary of this nascent recovery in industrial metals prices is the European Basic Resources sector(SXPP),which emphasises on global diversified mining groups.Indeed,t
6、he correlation between copper price in euros and the SXPP index level has been tight since 2016(Fig.2).From a fundamental viewpoint,while the basic resources sector is clearly cyclical and thus relatively volatile,we see an interesting combination of more favourable earnings momentum,which could ben
7、efit further from higher metals prices(Fig.3),and relatively attractive 5.8x valuation on forward EV/EBITDA,well below the 6.5x historic average(Fig.4).Please refer to important information and MAR disclosures at the end of this report Basic Resources:China in your hand Fig.1:Despite global slowdown
8、,metals prices rally Fig.2:SXPP sector driven by copper price Sources:Bloomberg,BNP Paribas Sources:Bloomberg,BNP Paribas 1 Edmund Shing,Global Head of Equity&Derivative Strategy BNP Paribas London Branch|FLASH 25/02/2019 2 Fig.6:SXPP volatility close to lows,but high skew Fig.7:Call Spread Collar p
9、ayoff Sources:Bloomberg,BNP Paribas Sources:Bloomberg,BNP Paribas Fig.4:SXPP is cheap versus its own history Fig.5:Investors remain bearishly positioned on copper Sources:BNP Paribas Sources:Bloomberg,BNP Paribas EQUITY&DERIVATIVES Edmund Shing,Global Head of Equity&Derivative Strategy BNP Paribas L
10、ondon Branch Very light investor positioning in copper.Looking at the net managed money positioning in copper futures,we see that it has declined sharply from the peaks in mid-2018 and even late 2018 to net short positions currently,according to CFTC and LME data(see Fig.5).Copper,one would assume,i
11、s clearly not an investment favourite today.Parameters favour risk reversals and call spread collars.The combination of relatively low short-term implied volatility but high 90-110%skew(Fig.6)suggests that upside call structures should include a short put leg to maximise the benefit from skew,with r
12、isk reversals and call spread collars acting as a stock replacement strategy for investors looking to take partial profits on existing long positions,while retaining some exposure to further potential upside in the Basic Resources sector.Sources:Bloomberg,BNP Paribas Fig.3:SXPP index price is traili
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