We see stability in commodities prices but are selective in related stocks and bonds.
Industrial metals have generally outperformed their commodity peers this year, with copper prices hitting a two-year high last week. A big reason for the rally: production has been falling from last year’s levels. This is a result of firms cutting capital expenditures after multi-year price slides.Read an excerpt of Richard Turnill's weekly commentary below, or view the entire weekly investment commentary here.
We see signs that reduced supply and increased demand may be more than temporary and are likely to help keep industrial metals prices stable from here. Metals and mining firms have been improving their balance sheets by reducing debt and decreasing investment in additional production capacity. Ongoing supply-side reforms in China, meanwhile, are curtailing overproduction of certain metals.
We see signs that reduced supply and increased demand may be more than temporary and are likely to help keep industrial metals prices stable from here. Metals and mining firms have been improving their balance sheets by reducing debt and decreasing investment in additional production capacity. Ongoing supply-side reforms in China, meanwhile, are curtailing overproduction of certain metals.
On the demand side, we see sustained global economic expansion and relatively healthy demand from China providing support. Our base case: Chinese demand growth should slow only gradually as the country rebalances its economy toward consumption. Risks to this supportive backdrop are any re-emergence of value-destructive mergers that have long dogged the sector, as well as escalating trade tensions between the U.S. and China.
The steady price backdrop in metals and mining appears to be reflected in the prices of many related assets. We advocate a neutral stance to metals and mining stocks overall. We do see opportunities in emerging market companies as well as in global firms with robust cash flows and dividend-growth potential. We favor a selective approach to metals and mining companies’ debt, with a preference for higher-quality high yield bonds.
Key Points:
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We see many factors supporting industrial metals prices from here, but favor a selective approach to metals and mining equities and bonds.
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The U.S. dollar fell and equity market volatility plumbed lows last week. Many U.S. and Japanese earnings results exceeded expectations.
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Friday’s U.S. wage growth data will be in focus after weak inflation readings and a cautious Federal Reserve outlook.
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