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Macro outlook supports the mining sector but further upside remains muted

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Macro outlook supports the mining sector but further upside remains muted

ETF Securities Equity Research: Macro outlook supports the mining sector but further upside remains muted

Highlights

  • Demand for metals remains well supported by a favourable macro-economic backdrop but China’s reform policy is expected to soften future metal demand.
  • The benefits of the weaker US dollar on higher commodity prices are outweighed by higher local currency input costs for producers in the mining sector.
  • Capex growth has turned positive for the first time in five years and the electric car revolution opens further avenues of investment for the mining sector.
  • Strict capital discipline among the miners has improved operational efficiency but miner’s valuations are not cheap.

Macro outlook supports demand

The global economy looks set to embark on a strong growth trajectory evident from the improvement in global purchasing manufacturing indices (PMI) since the second half of 2016. The optimism over global expansion increasing consumption of metals has led to a revival in the price of most metals this year. As a consequence, we have witnessed the top 100 diversified miner’s aggregate price appreciate 86% since 31 January 2016 (Source: Bloomberg).

Added to that, the current weakness of the US dollar is acting as an important catalyst in fuelling the commodity price rebound. As the world’s largest economy enters the late stage of the economic expansion cycle we expect to see tightening of the labour market combined with rising inflation, commodity prices and interest rates as the Federal Reserve normalises policy. The raw industrials index and the trade weighted US dollar tend to move inversely to each other with a negative 0.80 correlation. This counter cyclical relationship bodes well for base metal prices as investors look towards metals as a store of value versus the greenback. While the mining sector will benefit from higher commodity prices, the weaker US dollar could temper the benefits for producers that have a high proportion of costs in local currency.

China’s reforms take centre stage

A government led initiative in China’s construction industry since early 2016 underpinned the rebound of industrial metal prices. The emphasis on reforms as highlighted by President Xi at 19th National Party Congress in October 2017 suggests Chinese economic growth will gravitate more towards services and consumer spending. These activities are significantly less resource intensive and could soften demand for industrial metals. Added to that, the ongoing cooling of fiscal stimulus to the manufacturing and construction industries that kick started in H217, will further dampen new demand for industrial metals.

That being said, China’s supply side reform, to tackle environmental pollution, address unlicensed production and excess supply, resulted in significant escalation in metal prices last year. The widespread efforts improved capacity utilization rates within the aluminium, coal and steel industries. To a large extent, the impact of the capacity reductions in steel and coal appear to have already passed their peak, as the Chinese governments met their targets late last year.

Miners are back in business

After five consecutive years of negative growth in capex, total spending has finally turned positive, rising 8% since the prior year. A large part of the spending has been dedicated to sustaining production rather than expansionary projects. Miners are tapping into the new sources of growth led by technology driven innovation. At the forefront of this revolution, electric car production is expected to bolster demand for lithium, cobalt, copper and aluminium. Mining companies owning lithium and cobalt deposits are well positioned to benefit from rising demand owing to their use in battery cathodes.

Ongoing supply deficits projected

A vast variety of metals are projected to continue to extend their supply deficits into 2018 as demand outstrips supply. Declining inventory levels of global metals stocks namely – zinc, copper, aluminium, platinum, palladium and tin remain supportive of their price recovery. However deteriorating ore grades and falling reserves, make it vital for miners to undertake further exploration projects to maintain their current production.

Miners are not cheap

Owing to the challenging pricing environment between 2011 and 2016 the mining sector imposed a stricter capital discipline in an effort to shore up their balance sheet. Since mid-2016, valuations for the sector have climbed in lock step with rising profitability. Mining stocks currently trade at 17x earnings compared to the long term average of 10x, supported by higher earnings growth (Source: Bloomberg, as of 30 January 2018). Meanwhile, the current price to book ratio at 2x trades in line with its long term average of 1.7x as impairments charges reduced significantly. Recovering commodity prices, an emphasis on debt repayments and improving liquidity have helped alleviate pressure from ratings agencies as ratings outlooks for base and precious metal miners turn positive.

For more information contact:

Catarina Donat Marques
ETF Securities (UK) Limited
T +44 20 7448 4386

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Att tajma marknaden är en förlorande strategi

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När marknaderna blir volatila kan det verka lockande att tajma marknaden. Men att försöka det har visat sig omöjligt och kan bli ett kostsamt misstag.

När marknaderna blir volatila kan det verka lockande att tajma marknaden. Men att försöka det har visat sig omöjligt och kan bli ett kostsamt misstag.

Att titta på det långsiktiga mönstret för tjur- och björnmarknader kan vara frestande för vissa investerare. Varför inte försöka tajma marknaden och undvika dessa nedgångar? Skulle det inte vara bättre än att åka ut? Tyvärr är det inte så lätt.

Marknadscykler – Hypotetisk tillväxt på 10 000 USD investerad i S&P 500 Index (1951-2022)

Tidigare resultat garanterar inte framtida resultat. Index är ohanterat och inte tillgängliga för direktinvesteringar. Endast i illustrativt syfte. Datakällor: Morningstar och Hartford Funds, 2/23. www.hartfordfunds.com

Att undvika nedgångar på marknaden kan också innebära att man går miste om uppgångar. 78 % av aktiemarknadens bästa dagar inträffar under en nedgång eller under de första två månaderna av en återhämtande marknad. Om du missade marknadens 10 bästa dagar under de senaste 30 åren, skulle din avkastning ha halverats. Och att missa de enda bästa 30 dagarna skulle ha minskat din avkastning med 83 %.

Bra dagar händer på dåliga marknader

Att missa marknadens bästa dagar har varit dyrt

Tidigare resultat garanterar inte framtida resultat. Index är ohanterat och inte tillgängliga för direktinvesteringar. Endast i illustrativt syfte. Datakällor: Ned Davis Research, Morningstar och Hartford Funds, 22/2. www.hartfordfunds.com

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WisdomTree EURO STOXX Banks 3x Daily Short (OLJJ ETP) är en fullständigt säkerställd, UCITS-godkänd börshandlad produkt (ETP) utformad för att ge investerare en hävstångsexponering mot EURO STOXX-bankerna. Denna ETP följer EURO STOXX Banks Daily Short 3 EUR Bruttoavkastningsindex (SX7EGT3S), vilket ger en totalavkastning som består av -3 gånger den dagliga utvecklingen av EURO STOXX Banks EUR Bruttoavkastningsindex, justerat för att återspegla avgifter såväl som kostnader och intäkter som är inneboende i att korta aktier.

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EURO STOXX Banker Daily Short 3 EUR Bruttoavkastningsindex

EURO STOXX Banks Daily Short 3 EUR bruttoavkastningsindex syftar till att replikera den omvända dagliga utvecklingen av EURO STOXX Banks bruttoavkastningsindex multiplicerat dagligen med tre och justerat för att återspegla vissa inneboende kostnader för att upprätthålla de hävstångspositioner som krävs för att uppnå detta mål.

EURO STOXX Banks Net Return Index representerar de största företagen som tillhör banksektorn i följande länder i euroområdet: Österrike, Belgien, Finland, Frankrike, Tyskland, Irland, Italien, Luxemburg, Nederländerna, Portugal och Spanien.

Handla OLJJ ETP

WisdomTree EURO STOXX Banks 3x Daily Short (OLJJ ETP) är en europeisk börshandlad produkt. Denna ETP handlas på flera olika börser, till exempel Borsa Italiana, Deutsche Boerse Xetra och London Stock Exchange. Av den anledningen förekommer olika kortnamn på samma börshandlade produkt.

Det betyder att det går att handla andelar i denna ETP genom de flesta svenska banker och Internetmäklare, till exempel DEGIRONordnet, Aktieinvest och Avanza.

Börsnoteringar

BörsValutaKortnamnISIN
LSEGBx3BASXS2637076568
Borsa ItalianaEUR3BASXS2637076568
XetraEUROLJJXS2637076568

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