Is the tide beginning to turn for the UK Index miners?
It’s always been a question of balance, and after years of massive investment in commodities, culminating in three or four of massive overinvestment the world is now oversupplied and not growing like many hoped it would. But this has been the case for at least a year now. Analysts and investors now expect to see profits hit and the miners’ earnings reports are largely in line with those expectations. Lower profits are no longer surprising the market which means they’re probably pricing themselves in.
What may be surprising to many market watchers though is twofold. First, the extent to which the UK 100 miners have already recovered from the lows of the last 12-months, and second, a recent breakout above May 2015 falling highs on the Mining Sector index (MINING). Fundamentally, we’re seeing little change in terms of Chinese growth and the strength of the US Dollar, so what’s driving the recent broad based mining sector rally?
Past performance no indication of future success.
Never has the focus on a company’s 12-month outlook been so important. Sure, 2015 profits are down. Everyone knows what to expect there because things have been this way for a long time. But investors care about the future. For example, given the recovery (or re-growth) potential of mining stocks, the fact that hitherto generous dividend policies have been abandoned may be seen by growth seekers as a welcome cost-cutting measure. In the case of Glencore (GLEN), +100% from last autumn’s lows 66p, a debt reduction plan that’s ahead of schedule has reinforced renewed confidence in emerging markets.
Furthermore, Anglo American (AAL) pleased investors with its decision to streamline its operations, reducing its portfolio from 9 products to just 3 – copper, diamonds and platinum. This sort of action is welcomed by the markets because it addresses the supply/demand imbalance that’s keeping commodity prices low. Cut back on supply and the price should find support. In Anglo American’s case, its abandonment of iron ore and coal (demand for which is slowing) will have implications for the supply of both, while a concentration on rarer, more valuable elements like diamonds and platinum stand to benefit from growing demand (diamonds in the luxury goods market and platinum in the car industry) from a growing EM middle class.
