Why Savvy Investors Are Selling Rio Tinto plc, Hydrodec Group plc & Fenner plc

Investors have been ploughing back into the commodities sector en masse in Wednesday trading, the release of positive Chinese trade data releasing cooling fears of severe slowdown in the global economy.

Diversified digger Rio Tinto (LSE: RIO) has gained more than 4% from Tuesday’s close, to reclaim the 2,000p marker. And many resources-related shares have unsurprisingly been caught in the updraft, too — industrial belt-maker Fenner (LSE: FENR) was recently up 5% on the day.

China bites back?

Official data released overnight showed Chinese exports surge 11.5% year-on-year in US dollar terms during March, the biggest leap for more than 12 months.

But stock pickers should not be breaking out the bunting just yet, in my opinion. Whilst the increase in exports is encouraging, I believe a sustained recovery in economic data is needed before market commentators call a bottom to the downturn — Chinese exports slumped by a quarter in February, after all.

Besides, China’s imports declined yet again last month, this time by a chunky 7.6%. Sure, Rio Tinto and its industry rivals would have no doubt welcomed copper purchases hitting a record 570,000 purchases in March. Still, this is likely the result of tactical stockpiling rather than a sign of robust underlying demand.

And of course the mining and energy sectors need a sustained improvement in Chinese commodities demand to be complemented by huge cuts to total global production in order to slash chronic supply imbalances across most markets.

Battered belt-maker

Consequently, Fenner and other support providers to the diggers and the drillers are also not out of the woods just yet. The belt-maker advised last month that its “end markets continue to be challenging, most notably oil and gas where the North American rig count has reduced further.”

And the company faces further pressure as US coal mining activity is also on the back foot. Sure, Chinese coal demand may have galloped 15.6% higher in March. But news today that North America’s Peabody Energy has filed for bankruptcy underlines the massive upheaval facing the bulk commodities sector, and consequently the demand outlook for Fenner’s industrial parts.

Driller dives

Oil and gas play HydroDec Group (LSE: HYR) has failed to be swept up in the midweek buying spree washing over the commodities sector, the stock last changing hands 11% lower from Tuesday’s close.

HydroDec has suffered a delayed drop as investors digested yesterday’s news that losses had widened to $31.1m in 2015 from $8.9m the previous year. As well as battling falling revenues, the business was whacked by an $11.1m impairment on the value of its assets.

With cash heading out of the business at an alarming rate, HydroDec also announced plans “to extend its £2m secured second working capital facility with Andrew Black, a non-executive director … by a further £2.25m to £4.25m.”

Like Rio Tinto and Fenner, HydroDec is expected to endure further earnings misery in the medium term as commodity prices drag. As a result I believe the oil play — like many of its small cap peers — could find itself in extreme peril should commodity prices fail to snap resoundingly higher.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK has recommended Rio Tinto. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.