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Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.
Geopolitics and the mining sector
Geopolitical tensions continue to ratchet higher. There are now a number of geopolitical pressure points across the globe that are likely to be destabilising in the year ahead, including Russia/Ukraine, Israel/Gaza and China/USA. The situation in the Middle East is now threatening to spill over into neighbouring, commodity-rich states, even if supply disruptions have been limited so far.
Equally, even in the absence of military conflict, geopolitical tensions raise the prospect of protectionism over certain commodities and disruptions to supply chains. This is already being seen in the Suez Canal, as Houthi rebels attack shipping. In our view, investing in natural resources equities may represent an effective way to hedge portfolios against these mounting geopolitical risks.
China’s economic outlook
China remains one of the most important economy for commodity demand, particularly on the mining side and is an important area to watch when investing in mining and metal assets. In 2023, the reopening of the economy was disappointing, with data from China’s property market particularly weak. For now, we see few signs that the data is getting better.
That said, neither does it appear to be getting worse. There is also the possibility of stimulus from the Chinese government in the year ahead. This is already being seen at the margin and the government may decide to raise it further if the economy continues to weaken. The strength of the US economy is, to some extent, compensating for the weakness in China. We believe that the natural resources sector already appears to be pricing in a more negative macro picture than broader equity markets.
Infrastructure spending
Infrastructure spending, particularly to support the transition to green energy options, should be a demand driver for a range of commodities for the longer-term. The shift to renewables may see a move from an energy system dependent on hydrocarbons to one based on metals, with implications for the mining sector.
This transition cannot happen without certain key commodities. Power from offshore wind, as an example, is 2.4x more copper-intensive than power from coal and 3.3x more steel-intensive1. Supply for many of these commodities remains constrained, with mines ageing and relatively few new sources of supply. Faith in the energy transition doesn’t mean we are negative on oil, however, as the constrained supply side for oil gives us confidence in a period of higher-for-longer prices.
These factors could create structural demand for specific mined commodities in the year ahead, even if some softness in global economic growth will not lift all boats. At the same time, mining companies continue to show strong capital discipline, which should constrain supply in many areas. High dividends and lower valuations remain a feature of the mining sector and we believe it remains a fertile area for stockpickers.
1 Energy Monitor - Weekly data: Why keeping an eye on copper is vital for the energy transition - 17 May 2021
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Gold / Mining Funds: Mining shares typically experience above average volatility when compared to other investments. Trends which occur within the general equity market may not be mirrored within mining securities.
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