Mining Equities Shaping Up For A Relief Rally

We expect mining equities to stage a relief rally in the coming weeks, albeit within the confines of a longer-term downtrend. A break higher by the Bloomberg World Mining Index illustrates that several factors are aligning that should temporarily boost sentiment towards mining equities after three years of decline.

The catalyst for stronger investor demand for mining equities will be resilient metal prices. We expect gains for copper, aluminium, iron ore and zinc prices in the coming weeks. All these metals will benefit from an uptick in Chinese manufacturing activity ( see 'Surprise PMI Print Elicits Upside Risk To Growth', June 23), as well as commodity-specific factors ( see 'Metals Resilience To Persist...For Now', June 27).

We have also turned neutral gold, from bearish ( see 'Exiting Bullish Platinum vs. Gold View', July 1). We no longer target a move below USD1,200/oz by the end of 2014 and instead expect trade between USD1,200-1,375/oz. Elevated geopolitical risks to the global economy stemming from conflict in Iraq, combined with low developed market fixed income yields will maintain a supportive environment for gold prices. As a result, we do not rule out further gains for gold mining equities, which have already staged a relief rally in the year-to-date. A break higher by the NYSE Gold BUGS Index out of its current consolidation pattern would see us target additional strength for gold miners, albeit within the confines of a multi-year downtrend.

Additional Gains In Q314
Bloomberg World Mining Index (weekly chart)

We expect mining equities to stage a relief rally in the coming weeks, albeit within the confines of a longer-term downtrend. A break higher by the Bloomberg World Mining Index illustrates that several factors are aligning that should temporarily boost sentiment towards mining equities after three years of decline.

Additional Gains In Q314
Bloomberg World Mining Index (weekly chart)

The catalyst for stronger investor demand for mining equities will be resilient metal prices. We expect gains for copper, aluminium, iron ore and zinc prices in the coming weeks. All these metals will benefit from an uptick in Chinese manufacturing activity ( see 'Surprise PMI Print Elicits Upside Risk To Growth', June 23), as well as commodity-specific factors ( see 'Metals Resilience To Persist...For Now', June 27).

Bullish Break Out Possible
NYSE Gold BUGS Index (weekly chart)

We have also turned neutral gold, from bearish ( see 'Exiting Bullish Platinum vs. Gold View', July 1). We no longer target a move below USD1,200/oz by the end of 2014 and instead expect trade between USD1,200-1,375/oz. Elevated geopolitical risks to the global economy stemming from conflict in Iraq, combined with low developed market fixed income yields will maintain a supportive environment for gold prices. As a result, we do not rule out further gains for gold mining equities, which have already staged a relief rally in the year-to-date. A break higher by the NYSE Gold BUGS Index out of its current consolidation pattern would see us target additional strength for gold miners, albeit within the confines of a multi-year downtrend.

Mining Underperformance To Moderate
Ratio: MSCI World Equity Index / Bloomberg World Mining Index

Keep A Firm Eye On The Longer-Term

Looking beyond Q314, we continue to expect that mining equities will underperform broader equities. We expect key industrial metal prices including iron ore and copper to be undermined in the longer-term by downside surprises to Chinese economic growth. A myriad of headwinds ranging from cooling real estate prices to broader financial system stresses will cap Chinese economic growth over a multi-quarter horizon. Indeed, we maintain our Chinese real GDP growth forecast of 6.0% for 2015, which is significantly lower than the Bloomberg consensus of 7.2%.

Given these dynamics, we expect mining equities to further underperform broader equities over the long term after clawing back some ground in the coming months. For instance, the accompanying chart shows the ratio between the MSCI World and the Bloomberg World Mining Index. We expect the uptrend in the ratio to hold (implying mining equity underperformance), but for the degree of underperformance to moderate from the steep trend displayed over 2013.

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Related sectors of this article: Finance, Equities, Mining
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