Turning Bullish Mining Equities

We have entered a bullish mining equities view into our global sector strategy table, played through the MSCI World Metals and Mining Index. Mining equities look set to head higher over the coming weeks as investors return to the sector that has been in a bear market for three years.

As we recently highlighted, mining equities look poised for a relief rally in Q314, albeit within the confines of a longer-term downtrend ( see 'Mining Equities Shaping Up For A Relief Rally', July 1 2014). A break higher by the MSCI World Metals and 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 is resilient metal prices. We expect further gains for copper, aluminium, iron ore, lead and zinc prices in the coming weeks. All these metals will benefit from an uptick in Chinese manufacturing activity and commodity-specific factors ( see 'Metals Resilience To Persist...For Now', June 27). Meanwhile, gold prices should hold up in the USD1,200-1,375/oz area ( see 'Gold To Average USD1,200/oz In 2015', July 7 2014).

Further Gains Ahead
MSCI World Metals And Mining Index (weekly chart)

We have entered a bullish mining equities view into our global sector strategy table, played through the MSCI World Metals and Mining Index. Mining equities look set to head higher over the coming weeks as investors return to the sector that has been in a bear market for three years.

As we recently highlighted, mining equities look poised for a relief rally in Q314, albeit within the confines of a longer-term downtrend ( see 'Mining Equities Shaping Up For A Relief Rally', July 1 2014). A break higher by the MSCI World Metals and Mining Index illustrates that several factors are aligning that should temporarily boost sentiment towards mining equities after three years of decline.

Further Gains Ahead
MSCI World Metals And Mining Index (weekly chart)

The catalyst for stronger investor demand for mining equities is resilient metal prices. We expect further gains for copper, aluminium, iron ore, lead and zinc prices in the coming weeks. All these metals will benefit from an uptick in Chinese manufacturing activity and commodity-specific factors ( see 'Metals Resilience To Persist...For Now', June 27). Meanwhile, gold prices should hold up in the USD1,200-1,375/oz area ( see 'Gold To Average USD1,200/oz In 2015', July 7 2014).

A further rebound for mining equities should at least temporarily reverse the sustained trend of underperformance versus wider equities that has been in place since the start of 2011. The accompanying chart illustrates how severely mining equities have underperformed in recent quarters and we expect this trend to moderate.

Stark Underperformance To Moderate
Ratio: MSCI World Index / MSCI World Metals And Mining Index

While the three-month outlook for mining equities is bullish, we are not as positive towards longer-term prospects. Headwinds for mining equities will begin to mount as we head into 2015. 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%.

Bullish Breakout For Gold Miners
NYSE ARCA Gold Miners Index (weekly chart)
Global Sector Strategy
View Company Status Date Initiated % Gain/Loss Benchmark %
Bullish US Solar BMI Custom Index Open 23-Jun-14 -3.10 0.25
Bullish Global Mining MSCI World Metals & Mining Open 14-Jul-14 0.00 0.00
Source: BMI. Data accurate as of July 14. Benchmarking is against a long position in the country's benchmark equity index. BMI Custom Solar Index is a market capitalisation weighted index.

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This article is tagged to:
Sector: Mining
Geography: Global, Colombia, Global, Global
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