Baring’s Burstow still postive towards gold
Clive Burstow, investment manager on the Baring Global Mining fund says he remains positive on gold, with scope for further upside from its current trading range.
Over recent months, the general risk aversion in the market and the flight to what are perceived as “safe haven” assets has been driven by concerns surrounding the European debt crisis, coupled with questions over the pace of growth in strategically-important economies such as China and the US. All this has impacted investors’ appetite for commodities and resource stocks during this period. In the six months to July 17, the HSBC Global Mining Index has declined by 20.4% in US dollar terms in an environment where the MSCI World Index has gained 1.4%.
However, from the viewpoint of the Baring Global Mining Fund, we believe the long-term outlook for mining is supported by a favourable commodities price environment, driven by a constrained supply and sustained demand for metals, and predominately centred on the emerging markets. We argue mining equities, over the long-term, will benefit from the ongoing trend towards urbanisation in the emerging markets and the increasing demand for hard-to-find, hard-to-mine commodities worldwide.
The Baring Global Mining Fund aims to achieve long-term capital growth primarily through investment in the equity and equity-related securities of mining and mining-related companies. In terms of our portfolio positions, we continue to have an all-cap approach. This means we have the ability to tilt the portfolio towards small and mid-cap mining companies like London Mining, where we believe there is potential for positive earnings surprise. We also have the flexibility to shift emphasis to larger cap companies, should we feel we need to dampen down volatility and this is something we have done in recent weeks, with companies like Rio Tinto and BHP Billiton becoming more prominent within the Fund’s holdings.
Globally, signs of economic growth remain scarce, but we believe there are a number of positive indicators for mining if you look deeper. Firstly, though there is uncertainty surrounding the sustainability of the US economic recovery, China, which is one of the major consumers of commodities like steel and copper, is focusing on what we view as ‘quality’ of growth, rather than growth ‘for growth’s sake’. Hence, we believe that a 7-8% increase in gross domestic product in 2012 is a more sustainable long-term target.
Looking more closely at China, we continue to see strong prospects for effective and targeted stimulus by the central government which should filter through to the Chinese consumer and infrastructure spending. Both are important supports for commodities such as copper and steel, and the mining sector more generally.
Another key market for global mining is the US, where recent unemployment data have been very weak and the economic outlook remains troubled. Despite this uncertainty, there are indications that the housing sector, for example, is beginning to stabilise, albeit at low levels. An improvement in the US economic outlook over the next 6-12 months would be important for sentiment towards commodities stocks.
Declines in the supply of iron ore and copper continue, and we believe a number of miners are likely to disappoint in realising production targets in the coming quarters. We argue this is supportive of higher long-term commodity prices (see charts below, where the term ‘grades’ refers to the percent of copper found in a deposit). Additionally, in our view current industrial production and fixed asset investment expenditure levels suggest that the underlying demand for copper in China remains stronger than apparent consumption numbers indicate. We think this could improve demand for the metal in the second half of the year, particularly if credit conditions continue to be eased.
In terms of precious metals, we continue to be positive towards gold and we hold this position via a mix of equity and an exchange traded commodity (ETC). We believe there is still room for price elevation from its current US$1,500-1,600 range. The price environment for the platinum group of metals has remained underwhelming in the past 12 months, but we think that this will improve once we overcome short-term macro ‘bumps’. These metals have felt the impact of Europe’s debt crisis, with a general erosion of discretionary consumer spending on items like cars, the largest source of industrial demand for the likes of platinum and palladium.