Following a superb performance in 2016, the mining industry is positioned to continue enjoying the positive performance in 2017. In their January 2017 report on the global mining industry outlook, analysts from Citi projected that mining stocks will have a strong performance in 2017. This they explained will be buoyed by the trends across the industry globally whereby there is an increased free cash flow; earnings are experiencing an upward momentum and the potential to return excess capital to shareholders.
However, analysts at Stern Options in their daily market reviews noted that the odds of the mining industry outperforming other sectors within the capital markets will be minimal. “It is unlikely for the mining industry to experience the same percentage increase in stock prices as it did in 2016 due to the uncertainty surrounding global geopolitics in the wake of Brexit, the expected slow-down in China and the unknown international relations model a Trump presidency will adopt in the US,” the analysts noted.
Outside the super cycles that occurred between 2003 and 2007, the mining sector has been able to outperform the rest of the market for two or more years successfully only twice in the last 20 years. This happened for the first time in the last two decades during the tech bubble when the sector declined more than the rest of the industries in the market. The next time it happened was when the Chinese accelerated growth led to a recovery after the tech bubble burst.
2017 is expected to unfold for the mining sector in a similar manner it did in 2010 when the markets kept up with the momentum they had gained in 2009 bouncing back from the 2008 global financial crisis. Back then in 2009 the mining sector outperformed the rest of the market by 51%; in comparison last year the mining sector outperformed the market by 49%. “Mining remained the best-performing sector throughout 2016 barring a poor start to the year. The momentum slowed down during the last quarter driven by relatively poor performance in December as investors probably booked some profits,” Citi analysts wrote in their January global mining sector outlook note.
The positive momentum will be supported by several unrelated factors. On one hand, some investors will be drawn in the mining sector stocks by the fear of losing out on yet another year of outperforming the rest of the market. On the other hand, analysts believe that the bankruptcies in the mining sector globally that have been rising in the past have reached their peak and they project increase in capital expenditure and exploration activities. Mergers and acquisitions are however not expected to rally along the stock prices until the long run growth in commodity prices prove to be stable for the foreseeable future.
The clouds hanging above the projected rise in the mining sector stock prices include the depreciation of the Chinese yuan, which has not yet flown into the commodity markets and rising oil prices which will contribute to an increase in the cost of production.
In a separate research note in December 2016, Fitch Group research arm BMI also gave the global mining sector a green light for 2017. In their statement, BMI said that “We maintain a positive view toward metal prices over a 12-month horizon, boosted by improving supply and demand fundamentals, as well as rising global inflation.”
On the pessimistic perspective, BMI also identified China as a threat to rising commodity prices citing that “We expect the positive impact of stronger Chinese demand on global commodity prices to wane.” In their statement, they explained that stronger economic activity in China in 2016 and the associated commodities demand were central to the wider commodity prices re-bound experienced in the year. With the expected cool off in China and the fears about the depreciation the Chinese yuan a slowdown in the growth within the mining will probably ensue.
In his victory speech last year in November, US president elect promised to invest heavily in infrastructure development once he assumes office. This was a positive tide for the mining sector due to the expected high demand for metal and other commodities. However, the BMI research note released in December last year explains that the Trump effect has already been factored into the market prices and it will not have much impact when he actually starts to implement his campaign promises on infrastructure.
Despite the few lingering negative factors, the mining sector within 2017 seems to be poised for great returns just like in 2016. Investors who are yet to allocate their portfolios fully should therefore consider assigning some of their funds into the commodities sectors in 2017.