Top 3 Stocks Set to Benefit from China's Interest Rate Cuts

Everyone is now focused on mainstream Chinese stocks and their rallies resulting from the recent 50 basis point interest rate cut that the government just implemented there. However, these trades in names like Alibaba Group (NYSE: BABA) or Baidu Inc. (NASDAQ: BIDU) might be getting a bit too crowded now. So, the next logical step is to look at the falling dominoes.

In this case, investors need to lean on the fundamentals of Chinese growth and its effects on other economies that support it, such as oil and steel exporters, or any commodity-based economy for that matter. Because China draws over a third of the world’s oil demand, and its infrastructure demands are one of the biggest in the world as it is still a nation in its building, investors might want to focus on Brazil and even Australia to find potentially bullish trends.

It is stocks like Vale (NYSE: VALE) acting as a steel and iron ore maker, which exports a large amount of its inventory to China, or companies like BHP Group Ltd. (NYSE: BHP) in the basic materials sector from Australia exporting more metal needs to China, and even the unlikely Exxon Mobil Co. (NYSE: XOM) in the United States acting as a support pillar in China’s energy sector.

Key Tailwinds Position Vale Stock to Outperform the Market

Understanding that Brazil is now under new presidential leadership is vital. The ties between Brazil and China are stronger under this new administration, and therefore, exports from Vale may be one of the most bullish tailwinds that could hit the company in the coming quarters.

Now that the stock trades at 73% of its 52-week high, investors have a wider gap to run higher in a potential recovery or nearing previous highs. Here’s what Wall Street has to say about this potential run-up. Analysts now see a consensus price target of up to $16.2 a share for Vale stock, a good start on a potentially bullish thesis.

Vale would need to rally by as much as 38.5% from where it trades today to prove these valuations right, essentially bringing it back to its yearly high. More than that, short interest declined by 3.7% in the past month to show bearish capitulation in the face of this potential demand.

Management cited a few benefits in its latest quarterly earnings release. The freight costs in the China-Brazil trade route are now lower, opening the stock to better profit potential. Management is confident in the company’s future earning potential during these trends and has kept its $1.16 a share dividend payout.

This translates into a 9.9% dividend yield on an annual basis, which beats inflation and adds up to nearly 50% upside potential in this stock. This may be one of the reasons that VanEck Associates decided to boost their Vale stock holdings by 110.9% as of July 2024, bringing their net investment to $60.9 million today.

BHP Stock: A Strong Play for Momentum, Income, and Upside Potential

Better price action has landed on BHP stock, which now trades at 93% of its 52-week high. The bulls have already started to get behind this name because Australia is closer to China than Brazil. BHP’s copper, coal, and iron are the perfect mix to satisfy China’s energy demands in the near term.

Wall Street analysts noticed that the tailwinds created by China’s recovery are set for BHP. Citigroup and Argus placed a respective Outperform and Strong Buy rating on this stock, signaling better sentiment from the sell side.

New ratings on the stock weren’t the only piece of evidence investors needed to justify a potential buy. The Bank of Montreal decided to boost its BHP stock position by 532.2% as of August 2024. After this massive boost, the bank’s holdings are now valued at $134.4 million.

Aside from this upside potential and price momentum, management is leaning on these China tailwinds to keep a payout of $2.93 a share for investors, translated to a 4.7% annual dividend yield today.

Exxon Mobil: The Top Stock for Investors to Ride the Oil Cycle

Bulls also came to call Exxon Mobil stock their home, as it now trades within 5% of its 52-week high. The key to this bullish price action is that Exxon lists China as one of its largest export clients.

Now that both the United States and China have cut interest rates, oil demand coming from both nations (which Exxon serves) is set to spike in the coming quarters. Analysts at the UBS Group landed on a $149 a share valuation for Exxon Mobil stock, calling for up to 27.2% upside from where the stock trades today.

These analysts aren't the only ones expecting a new high in the stock, as bears started to retreat over the past quarter, as seen in the company's short interest. After these bears left, those at Legal & General Group decided to take their place by boosting their holdings by 19.3%, ending at a total investment of $3.7 billion today.

As a last check, Wall Street analysts now forecast Exxon Mobil's earnings per share (EPS) of $2.42 in the next 12 months, up 13% from today's $2.14 net earnings, outpacing most large-cap names in the S&P 500.