It sounds crazy, but there’s growing debate that mining stocks may become a “safe haven” following the collapse in the sector over the past few years – and this view isn’t dependent on a rebound in commodity prices either! Investing in resource stocks has been the quickest way to lose money with the S&P/ASX 300 Metal & Mining Index shedding two-thirds of its value over the past five years when the All Ordinaries is up 4%. It’s safe to say no one is ready to bet on a sustained recovery in commodity prices but the mining sector – along with energy – are the only sectors with “Armageddon” priced into their shares. If global equity markets are poised for a bear-market as some doomsayers are forecasting, then the downside risk for resource stocks will be a lot lower than for financials and industrials. And if the bulls are right about equities rebounding after a horror start to the New Year, resource stocks may not be such foolish bet either.
It seems the only way for a market recovery to be sustained is through central bank prime pumping with European and Japanese central bankers leading a renewed Quantitative Easing (QE) charge. The last time we had massive QE (by the US Feds) commodities were a big beneficiary. There is no reason to think a similar outcome won’t happen this time even with a stronger US dollar (commodity prices tend to be inversely correlated to the greenback). Secondly, the latest trade data shows that demand for commodities has not collapsed with commodity prices. In fact, demand has risen in some cases and this is important because it shows that the fundamentals are not as bad as many investors have priced into the sector. No one is suggesting that mining and energy stocks can’t fall further, but for the first time in over a year we might actually be seeing light at the end of this long, dark and cold tunnel.