Mike van Dulken, head of research at Accendo Markets, tells Hot Commodity why miners have struck gold from our decision to leave the EU…
FTSE miners are in a funny place right now. On the one hand, their share prices are supported by being among the major beneficiaries of a Brexit-inspired weak pound, getting a helping hand from a favourable translational gain on foreign profits. Which is all of the them, given that their London listings have everything to do with being quoted in the right financial centre and nothing to do with extracting minerals from within Blighty’s shores. On the flip side, a weak pound and a rising probability that the US Federal Reserve delivers another rate rise in December is keeping the US dollar strong, hampering the prices of their main products – commodities such as industrial metals – which would normally be a hindrance.
Except that oil is doing just fine, trading around 12-month highs on hopes that a production freeze/cut to put an end to a global supply glut is in the making. And oil often leads the commodities space, a signal of optimism about global economic growth and demand. Whether said hopes prove correct or not is by-the-by. What’s important is that markets are giving Opec the benefit of the doubt while its members meet for more informal discussions on the sidelines of the World Energy Congress in Istanbul. This is only two weeks since what was deemed a ‘positive meeting’ at the IEA forum in Algiers, where Opec mouthpiece Saudi Arabia importantly softened its stance ahead of the official November Opec meeting in Vienna. Will the world’s most famous cartel actually deliver?
Mining sector share price gains are also in spite of the sector’s strong links to global growth, a topic on which markets remain very uncertain to say the least. As we move into third-quarter earnings season, stateside Aluminium giant Alcoa has already disappointed and the IMF has cut growth forecasts for several developed nations, worried about the rise of populist anti-globalisation rhetoric. However, with miners still very much exposed to emerging markets (doing much of their digging there) and growth forecasts for these regions having increased, this is providing yet another helpful tailwind for rampaging share price recoveries from extremely depressed multi-year lows around the turn of the year.
So it’s a win-win situation for the miners from a currency, oil and geographic standpoint. The sector is proving to be a nice investment, sheltered from the Brexit turmoil along with many of those internationally focused US dollar-sensitive high-yielding defensives that everyone has run to amid the global hunt for yield. The latter has been engineered by years of extreme central bank stimulus deigned to keep borrowing costs low but which has taken many yields to near zero, if not negative. When this does finally unravel further down the line, could the mining sector once again prove a very unlikely and unintentional port in a storm?
Look at the FTSE’s best performers in the year to date. The miners make up the top five, up anywhere between a respectable 19 per cent and a whopping 244 per cent. Can a very favourable market set-up keep these trends alive? Will more hard Brexit talk send the pound lower? Will FOMC minutes and Fed chat send the US dollar even higher and the pound lower, maintaining that handy translational benefit? Could the US dollar pull back, giving commodity prices and emerging markets currencies a welcome boost? Will positive Opec talk keep oil on track for a $55/barrel price not seen for 15-months? Will fiscal stimulus and infrastructure spending, taking over from central banks, increase demand for raw materials?
Is everything just rosy for the FTSE’s miners, whatever the outcome?