Everyone knows you have to “buy low” to come out on top. The problem is that few people are actually willing to endure however long it may take for the "real low” to be put in place.
Market-wide profit-taking pressures coupled with prolonged weakness in commodity prices, namely due to anemic global growth and a slowdown in China, have taken their toll on the industrial metal mining business since 2011. The August 2015 sell-off only worsened the outlook for metals and mining ETFs, and the extremely oversold conditions in the space have in turn lured many “bottom fishers” and “bargain hunters” out as they wait for the inevitable reversal.
Proceed with Caution in Metals & Mining
The problem with “low” prices, whether you’re referring to commodities, equities, or another security, is that the “low” is likely to last a lot longer than most might be ready and capable of waiting for. Put another way, a security that is extremely oversold can become even more oversold, and what’s even more painful is that it can remain that way for an awfully long period of time. There’s a lot of merit to the saying “The market can remain irrational longer than you can remain solvent,” after all.
In the case of industrial metals and mining stock prices, the fact that these securities have been so beaten down for so long isn’t a compelling enough reason to invest in them. You need to have a meaningful catalyst on the horizon that might spark a fundamental reversal, otherwise you’re merely speculating based on valuation.
Why the Pain Isn’t Over, Yet
Metals prices, and subsequently miners, have faced a number of headwinds that won’t be blowing over any time soon; in fact, they’re only strengthening. In addition to weak global growth expectations, metals prices are also suffering from the uncertainty surrounding China. Although there has been much thoughtful commentary circulating that challenges the notion that China’s collapse would ultimately bring down the U.S., what’s actually certain is that when it comes to metals, China matters in a big way.
Consider the following from a recent IMF blog post:
Authors Arezki and Matsumoto go on to add this point which embodies why the pain likely isn’t over yet for metals: “The slower pace of investment in China in the last few years, however, compounded by concerns over future demand amid the sharp stock market decline and currency devaluation this summer, have been exerting downward pressure on metal prices.”
Adding to the headwinds are a supply glut fueled by growing metals exploration and production efforts across emerging and frontier nations. All in all, until growth becomes more entrenched globally, it’s perhaps more probable that the mining sector will continue to underperform.
Ways to Play
The Bottom Line
An attractive valuation without a meaningful catalyst on the horizon is a speculative bet that conservative investors should shy away from. While it’s undeniable that industrial metals and mining ETFs appear to be trading at attractive discounts, the reality is that the fundamental headwinds working against this industry could persist for longer than most are willing to endure.
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