Uncertainty and fear seem to be the current sentiments ruling markets and driving huge volatility across all asset classes. Multi-decade high inflation rates and the fallout from geopolitical tensions have pushed markets away from sanguine views on inflation as a temporary phenomenon, to concerns over stagflation and now to fears of outright recession in the second half of the year. Scepticism has increased to whether central banks are just too far behind the curve or even have sufficient ability to deal with the issue.
MSCI World Equity and MSCI World Metals and Mining Indices rebased to 100 at the previous equity peak.
With many equity indices now in bear territory overall miners haven’t fared too badly so far, as the chart above shows. Russian action in Ukraine and historical negative correlations with stocks in times of inflation have kept commodity prices buoyant, providing some support for mining equities. However, as concerns over outright recession have risen in recent weeks and commodity prices have fallen, mining equities have played catchup on the downside.
Nevertheless, the consensus outlook for commodities linked to the energy transition and decarbonisation (notwithstanding Goldman Sachs recent negative report on Lithium) over the next decade remains buoyant. And although progress to a net-zero world maybe put on a short term hiatus while the world “normalises” and deals with the post pandemic supply chain crunch and longer term implications from Putin’s war, the direction of travel is set. Furthermore, delays in action on decarbonisation now only result in more aggressive action being required later and in the meantime it isn’t getting any easier to find and develop new sources of critical minerals supply.
We are not attempting to pick the market bottom – as a fund manager once told me when I was being slightly overoptimistic on a stock call, “only monkeys pick bottoms” - but inevitably at some point equity markets will recover.
As we know history is not necessarily a guide to the future and of course to some degree ‘It is always different this time’ but nonetheless given the market sell off over the last 6 months it’s perhaps worth looking at what has happened to mining equities in previous market downturns and subsequent recoveries. The three most recent, the dotcom crash, GFC and Covid are shown below
Dotcom Crash - MSCI World Equity and MSCI World Metals and Mining Indices rebased to 100 at the equity peak and then again at the subsequent low.
The GFC - MSCI World Equity and MSCI World Metals and Mining Indices rebased to 100 at the previous equity peak and then again at the subsequent low
COVID Pandemic - MSCI World Equity and MSCI World Metals and Mining Indices rebased to 100 at the previous equity peak and then again at the subsequent low
A lot of bad news is already priced into equity markets but there may be someway further to fall before we reach the bottom. The good news from a mining perspective is twofold; the sector has not necessarily underperformed broader equity markets in previous downturns and has significantly outperformed in the 12 months following the 3 previous market corrections, and because of the energy transition the medium and long term demand picture is probably the best it’s been in many decades.