Prescient call on the mining sector by SBM

We highlighted on Tuesday the value we believe inherent in the mining sector (Link – http://www.spreadbetmagazine.com/blog/2012/10/15/mining-sector-takes-a-drubbing.html ) and it looks like our Mining sector Dream portfolio (Link here, page 21-http://issuu.com/spreadbetmagazine/docs/spreadbet-magazine-v9_generic)  is beginning to pay dividends with ERNC & Vedanta springing to life. We expect a final pay out from the Bumi/Bakrei issue north of 300p and think that Lonmin is one RNS away from a 20-30% move the upside. 

The risks are now growing for the bears that China will actually achieve a much better than expected landing and if this scenario eventuates the resource sector will receive a sharp boost –  a stance we have taken for the past 6 – 8 weeks and our call on a rebound on China. We continue to believe that both commodities and resource stocks are now highly oversold. Yesterday’s upward dynamic in many resource stocks was in our opinion the beginning of another “great rotation”. Some financial institutions will start to reallocate capital back into the sector and trade places between defensive industrials and resources stocks.

Many will miss this move in the resource space in the months ahead with the prevailing pessimism towards the sector and commodities generally taking a heavy toll on many an investor’s psyche – as is always the case in beaten down sectors over prolonged periods. For those that capitulated and sold their resource stocks, it will indeed be psychologically challenging to re-enter the sector particularly if stock prices continue to rise – as we believe they will in the months ahead.

These are troubling times for the super bears and the economists who have predicted dire forecasts for the global economy and financial markets. Our argument has always been that the market will move higher this year with equity valuations becoming cheap once again, central banks injecting an (over) abundance of liquidity into the system, economic growth in the major economies not completely derailing, and the fact that we have had more than four tough years since the onset of the Great Financial Crisis.

Standing back and looking at the bigger picture we believe that the sector rerating will occur on the back of a recovery in commodity prices –  a process which is already in motion as we detailed here (Link – http://www.spreadbetmagazine.com/blog/commodity-prices-remain-robust-yet-share-prices-languish.html). Already copper has pushed ahead of many other base metals, but we believe iron prices and other commodities will all stabilize and recover some of the lost ground this year as markets become more comfortable with China. The stronger import/export data from China last week did not really fit with the bearish scenario of growth slowing rapidly and even stalling.

Other emerging markets such as India and Vietnam have all experienced strong upward dynamics in recent months. Historically, China has been correlated to these markets, but we think it is just a matter of time before we see the stock market breakout to the upside after underperforming global indices for much of the past four years.