Commodity stocks have been volatile for years, with one-day falls or gains of 5% or more commonplace, even before the financial crisis. Lately, volatility has hit a new peak and there’s no end in sight.
Ups and downs
Just look at these numbers. FTSE 100 listed giant Anglo American (LSE: AAL) is up a blistering 98% over the past three months alone yet its share price remains a hefty 43% lower than it was a year ago. BHP Billiton (LSE: BLT) has been less extreme but still followed the same pattern, rising 18% over the past three months while still trading 44% lower than 12 months ago.
Sharp share price movements like these are impossible to predict in any sector. I called last year’s mining sell-off correctly, but was still shouting sell when this year’s rebound began. However, I would be wary of jumping into either of these two stocks right now, as I reckon the recovery has now run out of steam. If you buy these stocks today, you’re lining yourself up for a fall.
Dollar dips
There are already signs that that the party may be over. Anglo American is down 14% in the last week alone, BHP Billiton is down 11%. The commodity recovery was partly fuelled by stimulus from China, partly from the weaker US dollar, as expectations of further Federal Reserve tightening faded. Now China looks fragile again, and the doves are flying at the Fed.
The bears are also waking from their temporary slumbers, led by uber-growler Albert Edwards at SocGen, who has warned that risk assets have shifted their focus from the short-term relief of dollar weakness to the increasingly dismal prospects for global growth. The weak dollar, he warns, is merely a shuffling of deckchairs on the Titanic before the global economy sinks below the icy waves.
Prince Albert
No investor should plan their portfolio around Albert Edwards: that way all you’d hold is tinned food and bottled water. But sentiment has taken a downward shift, and I suspect we’re in for another variable summer, as markets ponder Brexit, pore over smoke signals from the Fed, fret over Chinese bubbles, and await the demise of Abenomics in Japan.
Anglo American is still struggling following a weak Q1 production report, with disappointing volumes for iron ore, metallurgical and thermal coal, copper, nickel and platinum. However, it has been boosted by a healthy $1.5bn from selling its Niobium and Phosphates businesses in Brazil, which will help the drive to cut net debt to £10bn by the end of this year.
Vale of tears
BHP Billiton has problems of its own, as it now faces potential fines of up to $44bn following the bursting of two wastewater dams at its Samarco joint-venture with Vale. That’s on top of the $3bn to $6bn settlement already reached with state and federal prosecutors. JP Morgan recently said it found the miner’s “premium valuation” difficult to justify, and the legal threats only add to the uncertainty.
Far-sighted investors may find a buying opportunity for both the stocks over the summer. I don’t think we’re seeing one today.