Just when you thought things couldn’t get any worse in the commodity sector, they suddenly got better. One minute big names Anglo American and Glencore were slugging it out for the title of the FTSE 100’s worst performer in 2015, the next they were posting double-digit monthly returns.
Contrarian investors who bought at the bottom of the market deserve to be congratulated for their courage, craziness and sheer good fortune. But will it last?
Large caps, massive gains
Incredibly, Anglo American is up 77% in the last month. That kind of turnaround simply shouldn’t be possible in a company with a market cap that runs to £7 billion. Glencore, with its £18.8bn market cap, is up 45% over the same period. These are multi-billion pound companies behaving like penny stocks.
BHP Billiton and , have been relatively muted by comparison, rising 10% and 13% respectively. But even that is pretty incredible, given that BHP Billiton has just admitted to a half-year loss of $5.67bn and slashed its dividend, while Rio Tinto ‘fessed up to a 27% drop in consolidated sales revenues to $34.8bn and dumped its progressive dividend policy at the same time.
Bulls Rush In
As a long-term commodity stock bear, who sold out of BHP Billiton and spent the subsequent two years shouting to anybody who would listen, warning that the China growth story couldn’t last forever, I am now in a difficult position. I missed the recent rebound and I still don’t believe in it, but I am also aware that this may just be sour grapes.
Investor sentiment has turned on a sixpence, as belief flooded back into the market. Last month was certainly a great time to go bargain hunting. The big miners were due a slice of luck, as they have been working hard to strengthen their overloaded balance sheets by boosting production, slashing costs, cutting capex, dumping non-core assets, slashing dividends and overhauling their strategic plans.
Bear In A China Shop
The truth is that the rebound isn’t down to anything the miners have done. Once again, it is all about China. Investors have been cheered by signs of a rise in Chinese infrastructure and construction demand, even if it is largely credit-fuelled. Iron ore prices recently recovered to $50 a tonne, up 30% from their December lows. Copper is also up to $2.16 per pound, up 10% from around $1.96 in mid-January. Where copper and iron ore lead, mining giants are sure to follow.
Yet I do not see Chinese demand recovering to former levels. Even if its economy avoids a hard landing, the country is shifting towards consumption and away from infrastructure and exports. Chinese PMI readings continue to slip, with manufacturing hitting a seven-year low, with the privately compiled Caixin measure showing a twelfth consecutive contractionary reading.
Commodity prices and stocks fell so low, so fast, that some kind of rebound was likely as valuations became irresistible. It is cruel to call this a ‘dead cat bounce’, but amid continuing signs that the global economy is slowing, it seems daft to hail it as the start of a serious recovery either.